Determine if Your Business can Create a Cascade of Cash
I’m a sales driven type of person – I like growing the business profits, chasing new customers. I’ve won some work, and I am putting my cash into the business to support the growth.
But after six months, there still seems to be a need for more money to be put into the business; this just doesn’t make sense to me.
Many business owners I talk to seem to struggle with growing their sales while producing enough cash so that business growth is self-funding. Typical problems are the owners borrowing against their house and lending money into the business. So much for the business providing you with a lifestyle – you’re actually funding the business’ lifestyle!
As a Melbourne Business Coach, how do I tackle these issues when I chat with and listen to business owners?
Top down approach
Take your sales, and multiply by your gross profit margin (sounds simple enough right?). If you have enough sales, then the gross margin should be high sufficiently to cover all your other costs. So this is the top-down method.
But, many businesses do not capture the direct costs in making/selling the goods/products. So gross margin looks high, but there never seems enough profit to meet the overheads, which now includes some of the direct costs to make the product.
So by picking a sales figure, you get a number at the end, if you don’t like the number increase the sales number. Sure, no need to worry about how you will get that sales number, or if you do, and it’s not achievable, then you get annoyed and frustrated that you can’t get your business to work.
When you are growing a business, it takes more cash, more investment into stock, or staff/labour, generally running the bigger business until your debtors pay you. And fast growing companies always seem to have a gap between the debtors paying and when creditors demand their money.
Bottom up approach
Another way to look at your business is to list out all the costs, the bottom up approach. The costs of making each product, and the total costs of the staff, and the running expenses. This method totals all your costs, to which then you need to add the “gross margin” from selling your products, to determine what is the level of sales you need.
Be very careful using this approach – make sure you always add your required net profit to the “costs”. This is the number you set for the business to reward you for your efforts and fund the lifestyle you have chosen.
Combining top down and bottom up approaches
When you use both methods, you are expecting to get the same answer. But over the years, time and time again, I see owners getting completely different answers using the two approaches. And they get confused and can’t understand why.
The answer lies in why your business is short of generating long-term cash; it’s your lack of gross profit margin. Costs could be too high, or your sales price is wrong.
As a leading Melbourne business coach, I work closely with my clients on pricing structures. Ensuring my clients understand the price and value of what they are selling and the relative relationship to competitors.
Only if you actually know the value of your “sales proposition” can you generate a business that will create a cascade of long term cash. If you want to have this free chat, then drop me a line.