How to Fix Cash Flow Problems in Your Business

If you're running a business, then you'll know the golden rule is to never run out of cash. Now, a lot of business owners mistakenly believe that they can fix a cashflow issue by going out there and doing more revenue. In other words, getting more sales.

But if things are broken in your company and you go out and get more revenue, guess what? You're just going to accelerate your cashflow crisis and put yourself out of business even.

So today I want to talk about why you don't control revenue, but what you can control to impact your profit and ultimately your cashflow. So let's go ahead and jump in.

If we look at what's going on out there in the marketplace, let me get the marker that actually works here. We'll go with blue. We have consumers and we have these consumers and these consumers are ultimately our customers. And I'll show you how they feed into our financial statements.

So we have the consumers here and really the macro trends that they're facing. Number one, interest rates are on the rise. And when interest rates go up, guess what? Mortgages go up as well, which means they have less discretionary income to spend on your products and services.

And did you know in the United States that 70% of our economy is built on consumer spending? So if they have less money in their pocket, sad face, it just means they're going to be spending less money with you.

Also, we're dealing with higher inflation and higher inflation is impacting not only the housing market, but also food and we'll just say gas oil. And if you think about how much oil goes into our products and services and transportation, et cetera, you'll know that this is wreaking havoc on consumers and their ability to spend more out in the economy.

And at the same time, since interest rates are higher and inflation is higher, their propensity to spend or their willingness to spend money is decreasing. And this willingness to spend money, guess what? Translates over here to your company.

So on this side, we have your business. We'll just draw a nice little business here, right? With a door and a window. This is your company, ABC Co. And if you look at your financial statements, you have revenue at the top.

And when customers are not as willing to spend because they're being squeezed by higher interest rates and inflation in the job market or fear or whatever it may be, then it's going to impact your revenue. So your revenue is going to decrease.

At the same time, we have operating expenses, OPEX. And this is the cost of running your business. While inflation is going up and interest rates are going up, most likely your operating expenses are going up as well.

So your revenue is going down, operating expenses are going up, which is a recipe for disaster or poor financial performance. And I'm going to show you how to fix all this.

Next, we have capital expenditures, CAPEX. This represents investments in trucks, trailers, equipment, or your building, manufacturing space, whatever it is to operate your business. And CAPEX can actually be on the rise as well if inflation is driving the cost of this equipment higher.

So as you can see here, the company's being squeezed, consumers are being squeezed, and this is how it all works together.

Now, the reason why I say you don't control your revenue, and it's important not to lose sight of this, especially when you're trying to forecast out the future and build out forecasts related to your cash flow.

So there are things in your control. So I'll say in your control, and I'll say out of your control over here. We're going to build a little quadrant here, two by two.

And then over on this side, we have inputs. And over here, we have outputs. So when it comes to out of your control, we have revenue over here.

Revenue is not in your control. Consumers are in control of your revenue because they decide whether or not they want to buy your products and services. So whether you're B2C or B2B, that's what I'm referring to, businesses or your customers, in other words, or consumers, they control your revenue.

So whenever you're building out a forecast, you have to be very careful of this because I've seen a lot of forecasts that are just totally overly optimistic and they skew what cash flow really looks like in a business. And remember, the rule number one is you don't want to run out of cash. And if you're skewed with your revenue because you don't understand the macroeconomic environment or you're being too optimistic with your projections, then you may think you have a lot more cash or a lot more runway than you really do.

Okay, so you don't control revenue. It's out of your control. But what you do control over here, and this is another input, is your cost.

Okay, you can control your cost. So remember, there are two different types of cost on an income statement. There are costs of goods sold, and these are all the costs associated with fulfilling your product or service.

It may include material cost, direct labor cost. It may include subcontractors or other direct and indirect costs related to, like I said, putting in place the work, fulfilling the product or service, handing the customer that final good, right, that you're selling.

Then you also have OPEX. That's your overhead cost. It may include selling and marketing, research and development, and just general and administrative items.

So those are your two types of costs, and understanding your cost structure is really critical.

Now, where most companies go astray is that they will look at their costs and they'll just start cutting indiscriminately. And you want to be very careful of that because if you don't tie your cost back to a strategy for your business, then you're going to be making cuts in your business that you'll later on regret.

So there's a business in the marketplace. I was close with them. Unfortunately, I never had the chance to help them, but they hired in a consultant. The consultant came in.

He pulled up their overhead cost and he sorted it from highest to lowest. He found that labor was the biggest cost, no surprise. Then he pulled an employee listing with everybody's salaries off to the side and he ended up firing and laying off the top earners because he thought they're the most expensive employees.

Little did he know, which is crazy that he didn't know this, that they were also bringing in the most amount of sales. So basically he got rid of the value creators. And there's this lie out there.

I can't remember what the actual lie is, but it's basically if you take the square root of the number of employees in an organization, they contribute 50% of the value, the overall value.

So think about it in a hundred person organization. If you take the square root of a hundred, it's 10. It means that 10 of the employees out of the hundred are generating 50% of the value.

So he basically got rid of the value creators in the business and sure he saved money in the short term, but it tanked the business. And I don't even know if they've recovered and it's been over a decade since he's done this.

All right, so you gotta be very careful with the cost, but these are in your control. You have to tie it back to a strategy though. And if you control your costs, then the output is profit.

So when it comes to businesses, if they're struggling with a certain industry and maybe the industry is being disrupted, or if you're operating in an economy that's getting tighter, you just don't want to lose sight of this whole side of the business that you can actually control.

And when it comes to profit, if you can also manage your working capital and your investments in capital expenditures, then guess what? You will have control of your free cashflow.

And free cashflow does three things. Number one, it allows you to pay back investors or yourself through dividends and distributions, pay down debt or reinvest in the business.

So this is what I wanted to lay out to you so you understood exactly what's in your control and what's out of your control. And if you're building a forecast to understand this relationship, because otherwise your forecast is going to be wrong because you may incorrectly make assumptions about your revenue, which ultimately trickles down and impacts your profit and your free cashflow.

So the financial operating system that we embed in every single company includes a forecast and a KPI dashboard and other tools so companies can manage cashflow.

But the biggest mistake that we see with businesses is that they don't understand these relationships and therefore the numbers are just off and they're not super helpful.

All right, that's what I have for you. Until next time, take care of yourself. Cheers.