Kerry Start Up 101: “Cash Flow, Revenue and Profit…”
Positive cash-flow is a universal management challenge for businesses, but the good news is that solutions can be straightforward. Jindrichovska examined SME cash flow and liquidity management (Jindrichovska 2014) and recommended some very simple steps such as having appropriate accounting systems and frequently reporting on cash flow / liquidity. These are obvious requirements when you think about it however, I often wonder how many small businesses fail due to cash flow problems without ever even having understood the principles. Having €500k in the bank in two weeks’ time is useless if your staff cannot be paid today. Engineering the cash gap out of your business is vital and I recommend you become obsessive about this point. The key components in reducing the cash gap are as follows:
- Invoice clients on time every time,
- Ensure incoming payment terms are shorter term than outgoing payments, i.e. money in before money out.
Your business will be transformed as a result and everyone will benefit.
Making a million euro (i.e. revenue / turnover) is straightforward but becoming a millionaire is not. Costs of generating revenue often trend as high as the revenue itself. Achieving serious profitability is hard and many people do not appreciate how difficult it can be. Focusing on profit often means achieving higher margins and constantly monitoring costs. Again, this is not easy but as the reputation of your business grows, opportunities to increase margins will present themselves. Developing and executing effective pricing plans are crucial elements (Meehan 2015) but first you must understand your value proposition and position your business appropriately.
And…there’s where the crossover happens. As a small business owner, it is crucial that you wear the appropriate blend of CFO, CTO, CEO, Marketing and Sales hats, each for the appropriate amount of time per day until the business can support each role in a full-time capacity. Then the timing must be right for the handover of some or all to the right people.
These a lot of balancing to be done there so use the Pareto principle where possible to keep breaking through each challenge, one at a time.
Jindrichovska, I. (2014) ‘Financial management in SMEs’, European Research Studies Journal.
Meehan, J.M., Simonetto, M.G., Montan, L., Goodin, C.A. (2015) Pricing and Profitability Management: A Practical Guide for Business Leaders, Pricing and Profitability Management: A Practical Guide for Business Leaders.