Key Takeaways
- Your cash flow is your key to survival and endurance
- Map your cash flows
- Improve your profit margins
- Negotiate with your vendors
- Be resourceful with cash
The old saying that cash is king has become even more relevant in these adverse times. Cash is a very precious resource. It is the only asset that can be turned into other things easily. However, if you are a small business owner, this can be a very tricky challenge. There are some hacks you can deploy to improve not only your cash position but also the profitability of your firm.
Early-stage organisations tend to have the most cash flow challenges in the business life cycle. Entrepreneurs rarely know where the profit pool is or which strategy will attract the right customers. At the start-up stage, the goal is to figure out your business model—how can I earn revenue, how are my costs incurred, and notably, how do I manage risk? Your enterprise is like a cash sponge; it absorbs money but does not let cash out. However, this might not be inevitable. These lessons can benefit you if you learn from what cash cow organisations do. However, mature firms have stable and proven business models, so the comparison is imperfect.
1. Map your future cash flows
In management, there is an apt saying that you can only manage what you can measure. Entrepreneurs can use many tools and concepts in the business field to improve performance. One great tool is the cash flow statement. While you might think this is only for accountants, it is for anyone who wants to gauge their future cash flows. It is like you are driving a car, and you have the fuel meter in full view--you need to get to a destination, so you estimate your fuel level. If, however, you run out of cash, then your car (venture) stalls.
A cash flow statement is easy to complete, as many templates are floating around. One tip is to remember that if you are an early-stage entrepreneur, you have little history, which means some conservatism is required. The future is always fuzzy, and no one knows how things will pan out. But remember, you can update your statement frequently on MS Excel as information comes to hand. In effect, you are creating a predictive model as a weatherman would.
2. Improve your profit margins
This margin increase is a tricky task. Low-margin items with high volume sales can decline. But there are lessons we can learn from other businesses that have mastered low and high-margin products. The supermarket business carries huge inventories, but much of this is at low margins, much of which they must store, and even with this constraint, they are cash cows. These items include flour, rice, sugar, milk, etc. How do they still carry the low-margin items and even make a profit?
Supermarket owners are frequently called grocers for good reasons. They must change the mix of what is sold to favour the higher-margin products. How do you change the baking supplies category's profit margin when flour accounts for over 90% of the sales? Besides, groceries do not have a salesperson near the shelf to encourage up-selling. Supermarkets use a trick I call the 'psychology of merchandising'. When you reach for the flour at the bottom of the shelf (the less premium space), you have the mindset of a baker. The grocer knows this and loads the premium eye-level shelf space with high-margin baking cups, rolling pins, baking chocolates, etc. When your mind is primed, it can trigger interest in that area, which is one of the first steps in a purchasing decision.
If you own a service business, the situation might differ as you might not have low-margin items. But you might need to learn the lesson of hooking the client with an offering by arousing their interest with a sample of what you can do by giving them a free presentation.
3. Negotiate with vendors
You might think trying to bargain as a new business owner is fruitless. But if you invest your seed capital or use loaned funds, your first purchase might be a large one-time buy. If you are opening a store selling automotive parts or pharmaceuticals, the opening stock means you can request a cash or volume discount.
If you have a service business and need software, look for services sold on a monthly subscription. At the same time, this will be more expensive in the long term, but who knows if you will need the extra cash to do something else? Of course, mature firms are in a better bargaining position, but remember, you can play competitors against each other.
Once I visited my bank and saw that they had a mortgage sale, the rate was lower than mine. I researched and found that the Central Bank's published rates were declining. Yet my rate stayed the same. I suggested to the officer that new borrowers should not get a better rate than I, and your competitors are also offering me a lower rate (this statement was approximately correct) to switch. As a good spin doctor, I negotiated a much lower rate than advertised and got even lower legal fees.
There is a big lesson here. We sometimes think that there are golden rules that cannot be broken. Almost everything can be negotiated, but remember, your clients could use this strategy against you. If a customer demands better payment terms or prices, try not to give in without getting something in return. The best thing to give up is something worthless.
4. Being resourceful
One distinguishing trait that separates businesspeople from entrepreneurs is how the latter view resources. Entrepreneurs see resources as having many uses and can innovatively apply their creative intelligence. To many, your home is a place to live, but entrepreneurs can use their home as a place or space (cyberspace) to operate a business. Bertie's pepper sauce started in the family's home.
You might think you need to rent space to open your service business. When I worked for a Fortune 500 company in the 1990s, my boss suggested I work from home. This oddity was initially a slap in the face, as I expected clients to visit me. He told me I would have to get to a specific volume if I wanted an office on the main street. But it worked out fine with a cellular phone and a laptop, and no one visited me. Eventually, I had my rented office but missed the home-cooked meals and the one-minute commute.
Finally, your cash flow counts as the fuel you need to keep your venture on the road to becoming a profitable cash cow.
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Sajjad Hamid is an Entrepreneurship Educator who supports entrepreneurs in scaling their ventures. In his spare time in Trinidad and Tobago, he tries to produce organic tropical fruits and vegetables and practices sustainable farming in his home garden.
He is the author of Build Your Legacy Business: Solopreneur To Family Business Hero.
Sajjad is a Fellow of the Family Firm Institute.
You can contact him at [email protected] or visit www.entrepreneurtnt.com for a complimentary mentorship session.
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