As an accountant with over 25 years' experience, and now as the Chief Financial Officer at 9 Spokes, my role has always been to keep a close eye on businesses' cash. It's a crucial job in good times and bad, especially in the lead up to the holiday season. As the saying goes, 'cash is king', and poor cash flow is the main reason 9 out of 10 small business fail.
Friends who run small businesses have asked me for advice on how to improve their cash flow. Obviously, selling more products or services is vital, but knowing which metrics to watch out for and optimising the way you manage certain areas of your business can really help with cash flow too.
We all know that running a small business can leave you feeling flat out, but I recommend dedicating whatever time you can spare to fine tuning a few key areas - it really pays off in the long run. Here are four things to keep on your radar:
1. Watch what's owing and what's owed
Keep close tabs on how much money customers owe you and always be aware of how much money your business owes. Additionally, ensure that your customers pay you on time and that you carefully plan when you pay the money you owe; it's easier to manage healthy cash flow this way. Having a handle on this puts you in a better position to comfortably pay bills and wages, as well as anything urgent which could crop up.
2. Closely monitor your stock levels
It might feel reassuring having a fully stocked warehouse, but it could be harming your cash flow. By managing your stock more carefully, you can ensure that money isn't tied up in unsold goods. A figure that can help you with stock management is your inventory turnover ratio. This is the cost of sales divided by your average inventory, and it shows you the number of times inventory is sold or used over a particular time period. Stock items with a high turnover ratio are going to help you generate cash from your stock.
3. Be aware of profitability
It's great to see strong turnover, but it's more important that what you sell is profitable. Measuring profit is a better way to really see how your business is performing - hopefully you'll see that your turnover is greater than your costs.
Gross profit is the total revenue from goods or services minus purchase costs. Your net profit is gross profit minus all other costs including salaries and wages, rent, administration and insurance. This figure will show you how much profit your business is generating.
4. Look at product margins
If you sell a range of products and services, it's important to know which ones are most profitable. This helps with deciding which areas of your business are worth concentrating on, as well assisting with important decisions such as where to reduce costs.
A product's gross profit margin shows how much of its selling price is going to your business. By comparing gross profit and gross profit margin on various products, you can see which ones are best for your cash flow.
There's a lot to think about, but one of the ways to easily track these key metrics is through the right business software. You can access this data through cloud business applications and be presented the simple, easy to understand metrics through the 9 Spokes smart dashboard. See 9 Spokes for more information on this.
If you want to learn more, grab our free eBook and discover how cash flow is one of the best ways to assess the health of your business.
By Neil Hopkins, CFO at 9 Spokes.