More Money Solves Most if Not All Business Dilemmas
A shortage of cash produces a range of emotions from frustration at lost opportunity through to the crushing heartache of self-doubt - black times when some are forced to consider “What if this doesn’t work out?”
Money does not buy happiness. I expect this is true in life, but less so in business, where stronger cash flow will solve most, if not all, dilemmas.
Those experiencing the discomfort of poor liquidity suffer unnecessarily as a fast-acting solution is available – a three-step process with application to all businesses.
Unlike the childhood frustration of having to wait… for the arrival of the new puppy, present opening time, or the last guest to arrive before commencing the feast, the fruits of this labour can be enjoyed immediately.
The greatest benefit will be experienced by open minded people with sufficient personal strength to question “industry norms” and who are able to envision a future beyond the limits imposed by others.
These traits are not to be confused with recklessness – the abandonment of sound principles and failure to grasp reality.
Let’s begin with a story of family tension. Peter and Ruth are proprietors of McKenzie Auto Repairs, until recently Ruth’s involvement being on paper only.
Poor Cash Flow Affects the Entire Family
"It's never the time, I am sick of it, so are the kids. We hardly see you, when we do you are exhausted, and we have nothing to show for it."A familiar lament
In the face of severe cash flow pressure, Peter’s response seemed the obvious choice of action.
It proved disastrous however.
As the family grew, their needs exceeded what the business could afford, so expanding the business by attempting to boost sales required no conscious effort, it just happened.
Three difficult years followed. Now Ruth demanded change. On several occasions, she questioned the sense of the long hours, high stress, and continual balancing act surrounding family finances.
Until tonight the conversation would always finish abruptly with Peter’s frustrated retort.
“You don’t understand business!”
But Ruth refused to allow her concerns to be ignored for a moment longer returning fire with an unexpected declaration.
“As a matter of fact, I understand more than you give me credit for! On Monday I met with our accountant who advised of a fast-acting fix to your cash flow problem, we are meeting with her this Thursday to discuss it.”
The timing of the confrontation proved perfect, it ensured the importance of the phone call Peter received a few hours earlier would not be glossed over…
He wanted to walk out of the business, and never return. Sometimes the pressure and frustration are almost too intense to bear.
Cash reserves are exhausted, again; the leading technician upset an important customer, again; and earlier in the day his major competitor announced a price cut. In a valiant attempt to salvage as much as he could from another tough day, Peter failed to notice the onset of evening.
The last three calls to his mobile went to message bank, callers at this time of the day seldom deliver good news. The caller ID now showing caused an involuntary curse, quickly followed by an overwhelming sense of despair.
In full voice from the moment Peter accepted the call, his daughter left no opportunity for a greeting.
“Dad you promised we would leave on time, you know I so wanted to see Kate before her performance, I just can’t believe you forgot about us. Mum said to meet us there.”
Before being able to utter a word, a harrowing silence replaced the angry tone of the distressed teen.
Nine hours work without a break for little if any progress, the broken promise to the most important people in his life just topping the day off!
He contemplated the implications of quitting, soon to arrive at the same conclusion as always - unrealistic and unpalatable.
No matter how many hours he must work, how inappropriate the return, and intense the stress; for all its problems, working for himself felt right, and he knows better times are just around the corner.
Ruth delivered their daughter backstage in time. Peter joined the audience soon enough, only missing the first act while noting his wife made no attempt to hide her displeasure. Later the same evening she drew the line in the sand.
“Something must give, you can’t expect us to go on like this forever!”
“This is not the time Ruth, I need to get some sleep.”
“It is never the time, I am sick of it, so are the kids. We hardly see you, when we do you are exhausted, and we have nothing to show for it.”
“You don’t understand business Ruth!”
“As a matter of fact, I understand more than you give me credit for! On Monday I met with our accountant who advised of a fast-acting fix to your cash flow problem, we are meeting with her on Thursday to discuss it.”
Subscribers to this blog (scroll up the page and record your name in the side panel) will read further instalments of our story. For now, I want to focus on Peter's error in response to his cash crisis, and the fast-acting fix Ruth is now aware of.
It’s a mistake made by many.
In response to poor liquidity we chase more sales. It seems so logical. If you are not making enough to make ends meet, do more.
However, adopting the traditional growth approach will not fix a cash shortage – it compounds the problem - in the first instance at least. To make more, you first must spend more. This is a major issue for an enterprise suffering from limited reserves, so the owner compensates by working longer hours.
Even if your sweat equity gets the company to the next level, the remedy is likely to be short-lived, because when your basis for growth is sales revenue, as you grow, you magnify existing problems.
The chart below illustrates what is required to eradicate a cash deficit through increased transaction volume. In the case of McKenzie Auto Repairs Peter needed to grow revenue by $222,000 resulting in the need for more staff, tools, space, stock, more everything! And of course, more customers mean more opportunities for things to go wrong.
The biggest mistake in business is to attempt to fix negative cash flow by growing sales revenue. There is a better way to deal with the problem, with a higher likelihood of success, and more suited to the expansion ambitions of the stakeholders. This is the lesson the accountant delivered to Ruth, the one she is insisting Peter hears about.
The Key to Improving Cash Flow is Change – Not Growth
I encourage business owners to increase profitability, at first, from their existing enterprise footprint – growth without a further investment in equipment, people, or production capacity. In other words, achieving more profit from the current sales volume.
Consider the impact of generating more output from the same input. Four clear benefits flow:
- Lower stress levels for the owners and the team.
- No requirement for an injection of cash.
- A much stronger base to launch growth.
- An immediate boost to cash flow.
As is obvious in the table below, Plan B is a much better option for anyone finding themselves running short on cash reserves. The key question is “How do we do that?”
Prior to addressing the answer, we should establish our expectations.
I did not create the material available on this site for proprietors to achieve a five or ten percent improvement in performance. My plan is for you to set a target measured in tens of thousands of dollars because small improvements to key parts of the business impact the profit earned in a significant way.
Creating additional cash flow of the magnitude outlined in the table below is possible. Most people struggle to accept this, owners as well as their advisors. I delight in changing their mindset.
Continuing with our case study business, I will outline the 3 step process whereby Peter can achieve an increase in cash flow of $1,067 per week, from his base profit of $86,500 per year.
Step 1: Pricing for Profit
By implementing a new pricing strategy today you will wake up tomorrow to a better, more resilient business. This first step is the reason Peter and Ruth’s accountant suggested the cash flow fix would be immediate.
Price, more than any other business variable, impacts profit the most as each additional dollar earned translates fully to bottom line profit – assuming, of course, there is no adverse impact on sales volume.
There is a reluctance to increase price because of the fear of losing customers. However, people are not as price sensitive as business owners believe them to be.
“I know, I know, your industry is different, competition is fierce, all customers care about is the price.”
Sorry, no industry is like that. (I am happy to participate in a debate on this, use the comments section below if you are so inclined).
This diagram represents the pricing structure present across all industries.
A small number of firms price at the lowest possible point, a similar quantity at the premium end, with the majority charging in the comfort zone.
The potential for significant profit improvement exists for any business occupying space to the left of the second line.
Peter Mckenzie's labour rate of $90 per hour is in keeping with the industry average allowing him, his accountant, and now Ruth to work on a number of initiatives - the result being a price increase of 7% with very little customer defection.
For a comprehensive examination of these strategies, and to gain an understanding as to how to implement price increases without losing market share to competitors I recommend you to the free course Pricing for Profit, requiring a commitment of only 29 minutes of your time.
For McKenzie Auto Repairs, the 7% increase produced $45,500 more profit. (With no additional costs accompanying a price adjustment every dollar gained goes straight to bottom line).
With an average invoice value of $345, the rate rise translated to an extra $23- an amount unlikely to send customers running for cover considering the 8 key pricing lessons outlined in the book “An Owner’s Guide to Building Business Profits And Cash Flow” (Click on the image below to read the 8 Key Pricing Lessons as a pdf file.)
The price increase delivered a 52% lift in profitability - a big number, one reported to me often. For the dual purpose of inspiration and support, I created a Pricing Cheat Sheet recording a sample of client pricing actions, and the outcomes achieved. I am certain you will find an example you can relate to and adapt for your own benefit.
Step 2: Segmenting Customers, Products & Services to Increase Effectiveness & Cash Flow
This topic will be a little confusing for some, numbers can mess with a brain, which is why accountants exist.
So significant is the gain to be achieved by getting your head around segmentation & effectiveness, opting out of this step is not allowed! I built a little system to help those who struggle with the financial aspects of business, take advantage of this important process, click the button below to access the system. - It requires you to engage your accountant or business advisor in some further work, something you will be able to afford if you follow the system! Click the button to access the pdf file.
We all realise some customers are not worth having and some jobs are not worth doing but continue to do this work in the belief the worst type of revenue is better than nothing at all – Wrong!
Service businesses generate profit from the conversion of hours worked to hours charged. Effectiveness is the measurement of the hours traceable to customer invoices, as a percentage of the total number worked.
What comes as a shock to owners is how low this % is, typically in the range 54% to 62%. The main reason for the poor result is the owner’s preparedness to do work they should not be doing.
The next diagram is taken from the free course Measure What Matters. The case study business referred to is the same one I am using in this post – McKenzie Auto Mechanics.
The workshop operated at a level of effectiveness of 56%, reaching a new target of 70% would mean an increase in annual profit $63,756; achieving only half this improvement would be a worthy outcome.
Improvement is not left to chance, you will be encouraged to work closely with your accountant following the logical process outlined below, and monitor results weekly.
- Establish a weekly net profit target.
- Calculate the gross profit required to achieve this target.
- Using a sample of invoices calculate the average gross profit per hour.
- Determine the number of labour hours to be recovered from customers at the standard rate to achieve the target.
- Monitor actual hours recovered each week (at the standard rate).
- Analyse variances weekly and take appropriate action.
What gets measured gets managed, my experience has been, without exception, the business owners who measure, each week, hours recovered, and the gross profit per hour, always generate a significant lift in gross profit and cash flow.
Cyclists, joggers, and people on diets measure performance and outcomes regularly. It focuses their attention on the goals they are striving for, and it has a positive impact on results. The same holds true in business, why wouldn't it?
The table below outlines the profit effect for Mckenzie Auto Repairs brought about the work done on improving effectiveness.
One of the main reasons for low levels of effectiveness is working on jobs with low margins. If you enrol in Measure What Matters you will use the tool pictured below to isolate the main profit driver of your business, and then segment your customers, or job types, on the basis of profitability.
This focuses the attention of management on profit, and encourages action to fix low profit job types and nurture the areas of the business where the potential for profit growth is most prevalent.
Step 3: Winning a Constant Stream of work from "A Class" Clients.
What do you think is the easiest thing to do in business?
Answer: Win new customers.
If you are surprised by this, you are in for a real treat. For those not shocked may I ask… “What is your concern about Step 1 above, the 10% price increase?”
Facebook and Google make winning new customers easier. This booklet is a great starting place, for those not yet up to speed, to learn the basics of digital marketing.
And because so many opportunities exist to win new work your advertising & sales processes must now be laser-focused on the recruitment of “A Class” customers.
Three drivers of revenue are common in all businesses – customer numbers, average transaction value, and how often customer transact in a year. As illustrated below only a small improvement across the three is required to achieve a significant lift in revenue. (Click here to view the image as a pdf)
Peter and Ruth McKenzie enrolled in the sales and marketing course and set about a structured process to improve customer numbers, the average value of transactions, and the number of times customers visited his workshop. A 10% rise in each of these areas produced $213,900 additional revenue! After taking account of costs the increase in profit amounted to $29,300 or $563 a week.
Achieving this outcome involved:
- The establishment of a recall system - like dentists are so good at doing.
- A stricter approach to add-on services, introducing a variations model, not unlike those common in the building industry.
- Offering customers a wider choice.
- Bundling service options (would you like to turn that into a happy meal?).
- Being alert to upselling and cross-selling opportunities and training staff in this discipline.
- Writing a two-page sales plan.
- Setting targets & reporting progress to a newly created three-person committee, being Peter Ruth and their accountant who are now in the habit of meeting monthly.
- Rolling out a digital marketing strategy with a $100 weekly spend on Facebook advertising.
- Maintaining a free Customer Relationship Management program (Google CRM if you don't know what it stands for), and if you want to know what I think are the best free options send me an email ([email protected]).
- Establishing a promotions calendar to ensure the scheduling of initiatives monthly.
- Creating a digital communications strategy to keep in touch with customers and seek referrals.
As noted earlier, when setting out to grow profitability your initial focus should be on increasing the profit earned from existing sales volume, this is why the marketing work is step 3 in the process.
Disbelief is the usual reaction when I set an expectation of achieving profit improvements of 60%, by making small changes to key parts of the enterprise. For some, their reaction is transformed to one of excitement when I break down the plan into three digestible steps.
As far as Peter and Ruth McKenzie are concerned, generating an additional cash flow of $1,067 per week became a realistic goal.
Improve your cash flow - starting today! Follow the link below to enrol in the free Profit Improvement program.