Knowing your number is one thing, here’s how to hit it. Cash Rich Business cash flow Q&A pt 1

An essential requirement for hitting a target is knowing where (and what) it is. As we have mentioned many times before, if you have not yet worked out your “magic number” (your expenses + tax payments + payroll + your pay +10% for the war chest + money to pay down debt) or the amount you need to earn each month, you are doing your business and yourself a huge disservice. Knowing your target is essential to achieving your target and you cannot do that unless you know your numbers.

But what if you do know your numbers and you have arrived at a “magic number” of say $30k per month? What then? How can you increase your chances of hitting that number consistently? Let’s get into a little Q&A. Here goes:

How do I get paid quicker if I can’t work any faster?

This is a common situation. You might be selling a product or service that falls outside the fast moving consumer goods (FMCG) realm where chewing gum, milk and food are paid for immediately, no questions asked. If you are a web developer, consultant or have a trade you may not have this luxury. At the very least, you need to collect full payment or at least a deposit before you commence work to alleviate potential cash flow issues. As we’ve said before, you’re not a bank, don’t act like one.

I keep getting blindsided by BAS or tax bills. How do I turn this around?

Most online banking services offer the facility to set up different accounts. The best way to ensure you’re not inadvertently spending the government’s money is to go ahead and set up an account called GST or something similar. Get in the habit of directing your taxes to a separate account and forget it’s there… until your BAS is due. It’s a discipline, but it will save you – again and again.

How many of my eggs can I put in the one basket?

This is an interesting one about how to future-proof your earnings as much as possible. One of the biggest threats to your business’s ongoing viability is relying on just a handful of customers to keep you going. If you are depending on one client for 20% or more of your revenue, you may find yourself exposed if you lose them, if only for a while. Work hard to get a good spread of clients to share the load. Achieving your magic number on an ongoing basis could depend on it.

How much money should my business put away for the inevitable rainy day?

Unfortunately, there will be a rainy day here and there. It’s the nature of business. In some instances however, it won’t be just one rainy day, you may have to face a month or two before the sun comes out again. As a rule of thumb, aim to have enough funds on hand to cover three months of operational costs. Now, you may never need your war chest or rainy day fund, but you will definitely sleep easier knowing it’s there.

Our upcoming Cash Rich Business workshops (June 2 and 15) are your opportunity to get all the answers to all your questions as well as important tips and guides to securing all the benefits of a cash rich business. Hope to see you there.

Don’t be surprised by your profits. Plan to nurture and grow your earnings

It’s always a great thrill when you look at your P&L and realise that you’ve made a profit. Let’s face it, everyone loves a profit, especially when it’s big and healthy and we don’t even mind if it’s an unexpected event. It’s hard to think of a circumstance where the sudden arrival of a substantial profit is not welcomed with open arms.

Too often, profit is something that small business owners fervently hope for, and when it arrives, it’s greeted with gratitude, relief and yes, even surprise. While it’s certainly a happy event, should genuine surprise always be the reaction? If it is, that would suggest a lack of planning and more than just a smidgeon of luck! As we all know, luck is a wonderful thing to have on your side but it is not to be relied upon to bring home the bacon month in and month out, year on year. For that you need a plan.

Planned profit is the best profit

Understanding growth indicators and triggers is an activity in which successful owners of cash rich businesses invest a lot of time. They understand that profit fluctuations occur for a reason – it’s not left totally to chance. Yes, we understand that being in the right place at the right has a lot to do with success but smart business owners also believe that there is a science and an element of planning behind sustainable profit and profit growth.

As always it comes down to knowing the numbers, being able to look at your P&L sheet and understand what has occurred and why. That’s only step one because having a firm grasp on past performance, in and of itself, may not mean that you understand what should happen next. This is why formulating a “profit improvement plan” with your “numbers team” (CFO, accountant etc) is critical to ensuring improved cash flow.

Planning demonstrates intent by setting forth actions based on what the numbers are telling you. Instead of simply hoping that the lucrative month you just rejoiced in is repeated in upcoming months, adopting logical steps that may call for planned operational tweaks and adjustments will help achieve that goal.

Sometimes when you win, you lose

It’s funny how one bit of good fortune, keeps you in the game – believing that there’ll be more good luck just around the corner. However, relying on the ebb and flow of profit fluctuations and hoping to “catch lightning in a bottle” from time to time is not feasible.

The hard truth is that if you don’t work with some kind of profit improvement plan, you will always struggle. Why? Because if you can’t rely on the achievement of a certain amount of profit or growth, you have little choice but “hustle” hard all the time. If you don’t have a profit improvement plan, you can also forget about planned holidays – the type where you’re not sneaking back to the room to check emails and payments and the like. Even on holiday you can never truly switch off and that, is simply not sustainable.

Truth be known everybody gets lucky – but no one stays lucky. Especially not lucky enough to build and sustain a cash rich business. That takes planning.

Don’t spend it all at once. A cash rich business takes care of tomorrow, today!

Hope for the best, plan for the worst. We’ve heard that a lot and the tax planning season, which is already upon us, takes elements of this saying into account. Saving tax to ensure you only pay your fair share and operating under the right business structure, form the backbone of strategies that help your small business help you. But there’s more to it than that.

As part of our Cash Rich Business workshop (June 2 and 15), we also highlight and signpost remedies to some fairly common and impactful business mistakes. There are 7 to mull over but one in particular can get lost in the shuffle because it isn’t a remedial or systemic error. It’s a behavioural/disciplinary/planning one.

CRB mistake #1 – Spending every cent you earn

This is turnover without the profit, it’s a salary without the bonus, it’s a job instead of an enterprise. Everything you didn’t want and nothing you did. By spending every cent that your business hauls in, you are essentially rebasing your business at zero every month, quarter and year. From month to month, you, your business, its value remain at a status quo. Aside from a salary, there’s no real advantage there and the reality is that nett-nett, nothing has been gained.

This is a difficult truth for every business owner who isn’t satisfied with simply breaking even year after year. It’s frustrating because you realise that a cash rich business should be providing you, the owner, more time and happiness and less stress and worry and yet it will not and cannot happen. Not unless you are actively building a war chest and putting you and your business in a position where opportunities can be seized as and when they arise and difficult circumstances can be dealt with thanks to a cash reserve.

While every cent is being spent, that’s not going to happen. Interestingly, the cause of these sorts of cash flow stalemates is often not down to reckless or thoughtless purchases…

It’s a question of timing, not spending habits

Capital expenditure is necessary and it often signposts growth and/or growth potential but as is the case with most things in life, timing is everything. Even the very necessary purchase of new office furniture or work vehicles can hurt your business if the timing is wrong.

A sound plan formulated between you and your team of numbers people (CFO, accountant, management team) after looking at your numbers will not only tell you when to buy but how to purchase. For example, an office refit might make sense for your business and the time is definitely right. Does that mean you should empty the coffers to make the purchase? Is there an opportunity to seek payment terms, if they are not offered? What are the pros and cons of leasing elsewhere instead?

By at least asking more of the right questions, you and your team will come up with ways to ensure that you don’t make the all-too-common mistake of periodically emptying the cupboard. You cannot be a cash rich business and enjoy all the benefits thereof, if you keep spending all the cash.

For more valuable insights into how to build a cash rich business, book your place at one of our workshops and experience the impact our tips, coaching and knowledge have on small businesses.
Cheers

Stop trying to squeeze blood from a stone. A cash rich business concentrates on creating value

Spending too much time and effort shaving valuable layers off your margins to remain competitive is literally death by a thousand cuts for your business. It’s excruciating, time-consuming and unfortunately futile. But as someone wise once said, “if you don’t like the answer, change the question.” That is to say, instead of focusing on discounting (sabotaging your margin), work on ways to enhance the value of your product or service.

Some business sectors call them upgrades, others – enhancements and others still prefer to rebadge the evolution of their services or products as “next gen”, “series x” or even tap into market segmentation (e.g. value, mainstream and premium). Whatever the case may be, thought and effort invested in increasing the perceived and/or actual value of the product or service will pay off. Admittedly, it can go too far as is the case with some dashboard screens. They display attention-grabbing warnings telling you that staring at your dashboard screen can cause accidents. That said, the intent to add value is front and centre.

The consequences of a common mistake

As the owner of a small business who not only feels the weight of family responsibilities but also accountability to employees and the business, it’s all too easy to fall into a common trap. Paying attention to noise like, “Desperate times call for desperate measures” in your business, could influence you to:

Pay a company debt from your profit, share, wage or dividend
Lower your price to match a low cost competitor
Devalue your product or service by advertising a sale for the wrong reasons

Sometimes, these measures are effective when used judiciously and/or as part of a broader strategy. However, using them time and time again sets and establishes a dangerous precedent because it:

creates unhelpful expectations in your market
threatens your cash flow and literally
takes food off the family table and limits quality time with them

Can things spiral out of control from there? They often do. So treat margin squeezes like a cliff’s edge – don’t get too close.

Develop a higher value product or service

When your business is running well, you the owner have a very pleasant dilemma. Do you spend more time with the family and develop more of your own hobbies or should you spend more time with the family and invest a little time working “on” the business? Well of course the answer is, “all of the above”. However, with systems in place and good people doing great work and freeing you from the operations side of the business, you can think about increasing the value of your business. Most business owners who do not do this find that they can’t because they are bogged down with everyday stuff. With so little time to come up for air, assess the situation/market/business, there’s very little time to devote to clear and innovative thought to adding value.

You got into this business as a means of providing a sustainable lifestyle for your family and to work on something that excites you. Focusing on value will do that while adding value to your life and the lives of those around you.

It’s time to take a chainsaw to your workload

The key to success is to work hard, we’re told. But they’re only telling us half the story. The often quoted saying should be amended to “the key to success is to work hard for a while and then enjoy the results.”

If you set sail on the dream of providing for your family through small business ownership and all you packed was the ability to work hard and keep working hard, you may be sailing towards frustrating and stormy waters. And I say that because I don’t believe the saying, “hard work is its own reward” should apply to what we do. A suitable reward for what we do is a decent amount of time enjoying the fruits of our labour with our family in a home very much like the one we always wanted. Put simply, you can’t feed your family with compliments about how long you can “stick with it”, how much toil you can endure, how much of your weekends you are willing to sacrifice on a regular basis.

Your family has everything and nothing to do with your business

We talk about the idea of owning a “Cashed Up Business” quite a lot. But to be crystal clear, we’re not talking about trading the life you should be living for cold hard cash. Your family time should never form any part of a business transaction or requirement. That’s yours, it’s sacrosanct and precious.

But sadly, it’s becoming easier is to get caught up in various versions of “work hard, play hard” and “I’ll sleep when I’m dead”. After all, there are few better feelings than knowing you are working tirelessly for your family and providing them a good life. Too often though, it comes at the heavy, heavy price of togetherness and a balanced lifestyle.

This may sound extreme and even out of reach for those already living within a cycle of long hours during the week, weekend admin tasks and very little sleep. But what’s the alternative? There has to be one because “no one ever laid on their deathbed wishing they had spent more time at the office.” No one!

Challenge yourself to chop your working hours in half

And here’s a bold and confronting challenge that I also like because attempting it will force a change of thinking. Cut your work time by 50%. What? Not possible? Take a long hard look at your work week as it currently stands. While you’re visualising that, please seriously consider the following questions and answer them honestly:

Are you busy doing tasks you could pay someone else to do at a fraction of what your time is worth?
What percentage of your time are you spending working in your business as opposed to “on” it? I know this gets thrown at you a lot but I’m asking you to think about the actual percentage split. 60/40? 70/30 in favour of operational tasks?
Are you able to fully “switch off” from work when you’re back spending time with your family?
Do you have documented processes and procedures? This enable your people to take over operations with no drop off in customer/client service should you decide to take off with the family for a few weeks.

Running a truly “Cashed Up Business” according to the definition that we are comfortable with is all about enhancing the lifestyle you currently have and bringing the dream closer to reality. This can happen for you and we would love to talk with you about the “how”.

Build a business built to last. Cash Rich Business tip #2 – Get your structure right!

Pick any business structure you like to launch your small business, it makes no difference at all in the very, very short term… and then suddenly… the pain. The type of pain that can really hurt you and your family because it will hurt your business right in the coffers.

The Cash Rich Business workshop on June 2 and 15, will guide you away from the pain that will come from setting up your business under the wrong structure.

It’s all on you and yours! But it doesn’t have to be

Often people who are taking up the opportunity to create their own future via small business ownership are baited into sole tradership by the lure of low set up costs and simplicity itself. They don’t realise at the time that the trade-off is that they become the business. Which also means they take on any and all liability associated with the big wins and telling losses that are often part and parcel of running a business.

To be clear, the business’s income is your income and that means the potentially sizeable tax impost is your responsibility too. Instead of paying the tax rate you’ve become accustomed to, brace yourself for a tax bill hovering somewhere around the 49% mark depending on the figures. Ouch!

What’s more, sometimes people make mistakes, things are misinterpreted and clients can feel like they need to be compensated. Not only does this mess fall into your lap but your personal assets can come into play from a compensatory perspective. Not good – in fact it’s bad.

In many cases, the same can be said for partnership structures. With the right safeguards under ideal circumstances, with people you would trust with your very life no matter what – perhaps a partnership structure could work. But again, personal assets can come into play if things go awry.

Running and benefiting from a cash rich business negates much of the downside and protects you from a range of difficult circumstances. Importantly, a cash rich business is most often the business that was built, established and now runs with a structure suited to:

Minimising tax so that those funds (sometimes tens of thousands of dollars) can be reinvested back into the business and/or your family
Protecting your assets so that what’s yours remains yours for you and your family to benefit from – even during times of difficulty within your small business
Maximising cash flow allowing you, your business and your relationships to flourish, thanks to less pressure, more opportunity and freedom to live life.

Operating your small business under the structure that works for you, starts with knowing and understanding your options. At Inspire, we are 100% committed to doing all we can to ensure you derive the best lifestyle for you and yours from your business. That’s why we delight in educating, sharing and working with clients on achieving these goals.

The Cash Rich Business workshop is a big part of this effort and we hope you can join us.

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Building a Profit War Chest and save your Business

How a Small Business owners can very quickly amass Emergency Cash Reserves and Build a Profit War Chest:

Most business owners don’t have the time to or know-how to read the different accounting reports necessary to manage the financial aspect of a Business.

So many resort to “Bank Balance Accounting”, which is where we look at our bank balance every day and make important financial decisions based on what we see.

Very dangerous waters … but that’s not the worst thing.

Sales – Expenses = Profit.

In other words, Sell as much as you can.

Incur the expenses you need to deliver on your promises.

Then whatever is leftover is profit.

Profit is a leftover. Profit is an afterthought.

No wonder so many business owners tell me there barely is ever enough profit left over!

What a shame, given all the effort you put in. But there’s hope.

I have been behind many very successful businesses, and as the owner of an Accounting firm, I have see everyday what businesses can do to stop bleeding cash and start accumulating great profits.

It doesn’t matter if you turnover $5M, $500k or $50. The Cash Rich Business Model works.

Here’s what Small Business Owners are saying about the Become a Cash Rich Business [Workshop]

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Want to flip the formula, put profit first and get on top of your numbers?

NEXT STEPS:

Book in a Quick 10 Min Chat here with an Inspire Chartered Accountant to talk about Tax Saving Strategies that will work for you.
Attend our Cash Rich Business Workshop where we will spend 2 hours walking you through the exact step by step process to become a far more profitable business than you currently are. https://inspireca.com/events

Building a “profit war chest” is just like riding a bike. A crucial step towards becoming a cash rich business

Most business owners agree that cash is the oxygen that keeps the heart of a commercial enterprise pumping. It doesn’t matter if we’re talking about trades, financial services or product sales and distribution, without a healthy cash flow, things start looking pretty sickly. So it’s always a good idea to build a cash reserve, an easily accessible emergency fund, a war chest. But the question is how?

This June 2nd and 15th, we’ll be conducting “Cash Rich Business” workshops aimed specifically at helping small business owners rid themselves of the anxiety and stress that comes with cash flow problems. During these workshops we directly address the topic of building your “profit war chest.” Something sturdy and reliable that will be there for you if unforeseen circumstances create a sudden need for cash.

Keep your eyes on the road and your finger on the pulse

At Inspire we believe that your finger must stay firmly on the pulse of your business’s critical numbers at all times. One of the reasons for this is that it will help you “pick a number” between 10 and 25. That number is the percentage of income that most businesses are able to claim as profit. What’s yours? Got it? Great, so after paying your regular outgoings, tax, salaries, paying down some debt and of course paying yourself, you’re ready to commit your agreed set percentage to your war chest.

But here’s where the riding a bike part comes in. We suggest starting off by committing an amount smaller than your target percentage to get started. Have you ever seen someone try to mount a bike that was already travelling at or near top speed? Disastrous, painful and ultimately you don’t end up getting anywhere (maybe the hospital). It’s best to start your contributions off at around 5% – see how the business reacts. Keep your finger on the pulse. Does the heart keep beating steadily when you up it to 10-15% a couple of months later? Is there a spike in blood pressure, sweaty palms, rapid breathing? Adjust accordingly, when you find equilibrium, stick with it.

By knowing your numbers and understanding what they are telling you about your business, you’ll be able to rest easier at night knowing that your war chest is there for you should the need arise.

How big is too big?

When it comes to war chests keep in mind what it’s there for. Its purpose will determine the amount you keep on hand. As a guide, understand that many crises can be safely navigated within a month or two. We recommend growing your war chest so that your business can comfortably stay afloat for three months. With three months’ worth of funds on hand, should major difficulties arise, you can work through your circumstances without dealing with the usual white hot panic.

Once your war chest funds exceed that three month funding level, you might consider distributing a dividend to say thanks and well done. Cash on hand for your business is one thing – and it’s an important thing. But as always, remember why you decided to own a business. It’s a vehicle to provide for your family and ensure you get to spend more valuable time enjoying life with them.

A cash rich business will get you there. Join us in June to learn more.

The 10 minutes that could save you hundreds every month. Get ready for the Autumn “spring clean”

It’s the invisible expenses that hurt your business the most – he amounts that sneak under the wire of your business accounts every month or quarter. And even if you were asked point blank to name them all, you just couldn’t. But who cares, right? They are just small expenses – subscriptions or memberships probably. Besides, you never know when they’ll come in handy.

C’mon, get serious! As soon as you start losing respect for your hard earned money, no matter the amount, you’ve started your descent on a very slippery slope. But all is not lost, after all it’s only a small amount… or is it?

How much money are we talking?

Well you tell me. I personally went through an exercise, call it a self-audit if you like, some time ago and was shocked at what I found. Now to be clear, I’m not referring to snacks or casual drinks with friends from time to time. This is certainly not about curbing your lifestyle. It’s simply about looking hard at where your money is going and a fair sum of it may be heading down the gurgler wrapped in unused subscriptions and memberships.

Some context: I love tech, I love being on the cutting edge, I feel it’s absolutely necessary to work smarter in order to enjoy all life can offer. That definitely means enlisting help from some carefully selected apps. The problem is, we’re not always as careful as we could be. I’m not saying I bought a dud or subscribed to something that doesn’t work. I mean that too often, I got caught up in my own good intentions. I always intended to trial apps, make notes, carefully assess how they could be integrated into my business life with a view to freeing up more time. But I would never got around to it. By the time I did, I found that the free trial period had expired and I had already paid for 4 months before I realised I still had it.

Thinking about the costs, too many people take up the free trial of a promising piece of software and possibly take up a membership to an enlightened collective of likeminded thinkers only to be blindsided by a busy period at work. A few months pass and suddenly they realise they’ve been paying for 3 or 4 subscriptions and membership fees to something they hardly ever attend, to the tune of $235/month. That’s usually just the start!

Ok, I want to bank that cash, how do we do this?

You can actually do this yourself and/or sit down with your accountant for an honest chat about what it is you’re actually trying to achieve. Here are the key three steps.

Remind yourself about what it is your business needs to achieve (tip: think vision, mission, values and your magic number – the earnings your business needs to pay you (properly), your team and expenses including tax, paying down debt and contributions to your “war chest”)
Identify any and all expenses that directly benefit your business by advancing you towards the sustained achievement of your magic number
Eliminate ALL other expenses. You will discover those unfamiliar looking but regular direct debits to “somethingtech” and “CU There meet-ups” as well as emags that come floating past your inbox and are almost instantly incinerated by your firewalls.

It’s all got to go because it’s eating into your precious profit as well as whatever you were going to put on the family dinner table tomorrow night.

Take breath, take a look and take a scalpel to all those unwanted, unneeded expenses hiding in plain sight and put that money towards your cash flow.

Go ahead.
Cheers

3 reasons your original purpose can determine your future

If you can’t tell someone in two sentences what you do and why, your business is in trouble or heading that way. Sure you may have a solid business structure, you’ve minimised your tax and things might be going well but your sales and/or service pipeline is kept full by a fuel called purpose. Purpose is not something that your business should stumble upon along its journey. Purpose is not something that you should rely on appearing to you in a dream sometime during your second year of business and suddenly turning things around if times are tough. Purpose needs to be there with you right from the very beginning or things could come to an abrupt end.

There are a lot of books about finding your purpose in business and life but I think for the small business owner with a family to provide for, it’s important to understand how purpose helps businesses.

Returning to base to refuel is vital

Yes it is. But you have to make sure you have a base first. Starting off with a clear vision of what you are going to achieve, with what, why and by when, is a great first step in any business venture. Especially, when compared to vague launch ideas like, “I want to open a bakery, I love bread so here’s some cash, let’s get started.” Disaster waiting to happen.

When things get complicated, and in small business they will from time to time, nothing shines through the mists of confusion and distraction like your original, clear purpose. Your why. Getting back to your why, refreshes you, refocuses your efforts and clears a path forward.

Helps you steer clear of expensive distractions

Pouring your energy and effort into your original intent in the right way is time and money well spent. We find that some small businesses try to get too big too fast or get distracted by opportunities to diversify before they are properly established. Succumbing to anything that tempts you away from fulfilling your original intent will end up costing you – time, money and family time.

Tip: keep your original statement of intent or vision, mission and values displayed throughout your workplace as a reminder of why you’re there and what you’re doing. Anything that doesn’t get you closer to achieving that purpose qualifies as a distraction. Avoid it.

Focuses your team on operations so you can focus on the business

As mentioned throughout other blogs, you cannot do this on your own – not for the long term anyway. You’re going to need help but as they say in the classics, you’re going to have to help them, help you. If you work to:

clarify your original purpose,
document your processes and
ensure everyone knows the path your business is on

…you will enable and empower others to look after the operational side of your business while you drive the vision. A vision that hopefully sees you drawing more money, time with family and happiness from a business you started or bought, for that very purpose.