Your seven keys to perpetual cash flow
Here's a powerful tool to project and control costs and revenue
The top problem facing small business owners is a lack of cash – cash to pay themselves, their employees, suppliers and vendors, to invest in marketing and sales and to achieve sustainable growth. The reality is that a business can last for years without making a profit, but you can’t last a day without cash.
When business owners are so focused on making a profit that they neglect to watch their cash flow, they can quickly find themselves with strong sales and receivables but without the cash resources to meet short-term obligations. Try spending your accounts receivable on rent and you’ll see why it’s still true that “cash is king”, and why even profitable companies can experience the dreaded cash crunch.
However, we have a solution – engineer your cash flow by monitoring and controlling these 7 Key Numbers® and you’ll never run short of cash again.
#1: Number of Leads
Every business owner needs to closely monitor the number of new leads your marketing is generating. You need a constant stream of new customers to replace old ones and to grow the business. Watching this number will tell you the effectiveness of your marketing and make sure that any investment you make in advertising produces a sufficient ROI.
#2: Conversion Rate
How many new leads does it take to make a sale, and how many sales do you need to close to meet your revenue goals? Monitoring your sales conversion rate will allow you to compare it to industry or historic averages, and will show you how well your sales team is performing. When you are generating new qualified leads and are consistently turning enough of them into sales, then you will have a constant inflow of cash.
#3: Customer Retention
How many times will each new customer or client do business with you? Stated another way, how many transactions per customer can you rely on? Keeping a customer is far less expensive than capturing a new one, and your retention rate correlates directly with your customer service and the overall experience you offer your buyers. Exceed their expectations and they’ll keep coming back.
#4: Average Transaction Per Customer
What is your average sale price? If you are a dentist, what is your average revenue per office visit? For a remodeler, what is the average price per job? When you know this number, you can then look for ways to increase your average transaction through upsells or add-ons. And by looking at your average transaction amount, along with the average number of transactions, you’ll be able to calculate your Customer Lifetime Value – a useful tool to maintaining perpetual cash flow.
Service businesses in particular can quickly improve their cash flow by testing to make sure that they are pricing their services correctly. Pricing should be in line with actual costs plus an adequate margin of profit that allows for sustainable growth. Yes, your prices must be competitive, but be careful not to allow your competitors to set your prices – they may be losing money and not even realize it!
#6: Variable Costs
Are your purchasing procedures allowing you to buy materials at favorable pricing and terms? Do you have processes in place to protect you from overcharges from subcontractors and suppliers? Are your estimates consistently on target? Are you delivering your product or services in the most effective way? Measuring variable costs as a percentage of sales will let you know how well you are doing in managing the costs associated with producing and delivering your product, and controlling these costs can have a huge impact on your cash flow and ultimately your profits.
#7: Fixed Costs
Is your overhead in line with your revenue? Fixed costs are the costs of keeping your doors open– rent or lease payments, equipment, utilities and salaries – including your own. You should measure fixed costs as a percentage of all sales and make sure that your costs are scalable and in sync with revenue.
How to use these numbers.
First, determine a value for each of these seven numbers. Then, set goals for each. Create processes for reporting these numbers on a daily or weekly basis, and watch them carefully. When you see an actual number that is falling below your projected goal, address that immediately to bring it in line with your projections.
By creating processes to manage these seven key numbers, you’ll have a powerful tool to project and control both revenue and costs. The result will be a leaner, more streamlined company that produces consistent, predictable and sustainable cash flow – and will continue to do so well into the future.
Jeffrey Prager is a founder of Cash Flow Engineering, LLC, a training and consulting company helping small- and medium-sized businesses develop and implement marketing, sales, operational and financial systems that generate consistent and predictable cash flow. Jeffrey can be reached at 303-549-6176 or jkprager@CashFlowEngineering.com.