Today I want to talk about cash, or more specifically cash flow and why cash is king. It doesn’t matter how much money you make, what’s important is how much of it you have available after collecting all payments and paying out all your monthly expenses.
Many businesses struggle in their first few years because they’ve gone into their business venture full of enthusiasm and wearing rose coloured glasses, and then quickly run out of money because the money going out exceeds the money coming in.
Were They Dumb?
I knew a couple who spent over $200,000 to open a podiatry business on the Sunshine Coast, and they went broke within 12-months. Was it because they were dumb?
Well, the jury is still out on that, but from what I observed it was a cash flow problem from day one.
From the outset they:
- Began their business venture with limited capital and therefore borrowed too much money, resulting in larger than normal monthly repayments, which immediately ate into their cash flow.
- Purchased equipment they did not need
- Made purchases for home and added it to the business repayments. (That’s pretty dumb)
- Gave out accounts without any questions
- Gave discounts too often
- Got financial advice from unqualified family and friends
- Began with limited CASH
Right from day one, they were trading with insufficient cash flow, and this caused them a lot of stress. Starting a business this way is crazy.
But, I’d like to point out running out of money before running out of the month is not just a problem for new businesses either, it can also happen to establish businesses if they do not pay attention into watching their cash flow and monthly expenditure.
Even a successful business can go broke if they are not getting paid fast enough. If you must pay $10,000 rent this month, a $20,000 payment owed to you in 90-days is not very helpful, so the speed at which your accounts are paid is important.
If your business gives out accounts you need to have a strict account policy and everyone needs to adhere to it and if someone is late with a payment, there should be a process to follow and do not give them additional credit hoping they will pay.
When I had my podiatry business I had a zero account policy, and yes, a few patients did complain, but they also made an appointment and paid their account in full. And they returned and never asked for an account a second time.
After 30 years I had no bad debts.
It Is Possible
You may be thinking this is impossible in your industry and maybe that’s true, but still, give it some thought, or at least review your current payment terms. If your invoice says 30, 60 and 90-days then you’re telling everyone they’ve got 90-days.
Why not change it to 7, 14, 21-day and overdue.
I feel that every business should work towards having enough cash in their bank account to cover all their business expenses, including wages for a minimum of three months.
You may or may not agree, but that’s my thinking because lack of money is stressful, and stress affects your judgment and decision-making capabilities.
You want to build your business with a clear head, not a cloudy head concerned with paying next month’s rent.
Good cash flow allows you to:
- Pay all your accounts on time, which suppliers love, and it builds trust. And if for any reason you did get in a financial pickle down the track, your suppliers will help you where they can.
- Gives you the ability to purchase in bulk and make significant savings.
- Saves money on freight because you’re ordering fewer times throughout the year.
- Build trust with your team. Your team sees everything, and nothing destroys confidence in business more than ongoing phone calls and emails from creditors
So here’s my warning: DO NOT OPEN your business if you don’t have enough capital and the cash to sustain the business.
You are better to wait for another 12 to 18 months and do it properly because you also need to allow money for marketing.
Marketing is going to be a key component to your business success, and many new businesses do not allow for marketing in their budget, and when business gets tough, marketing tends to be the first thing cut.
That’s a big mistake, so make sure you budget for it in your financial forecast.
- Cash is King
- Cash flow is the amount of money available to you each month after collecting all revenue and paying all your monthly bills. Ideally, you want to see your cash flow going upwards.
- If your business gives accounts limit the payment terms, or don’t give out accounts at all.
- Aim to have enough cash in your bank account to cover three months of expenses so you can think clearly.
- A good payment history builds trust.
- If you don’t have the capital and cash to start your business right now, don’t rush into it.
And if you're a Podiatrist or in the health industry and in private practice, or considering going into private practice quite soon, do not undervalue the benefits of having a business coach or mentor because you will get the results you're after much faster.
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