Success Stopper
#7:
Not Playing Your Numbers
by Rosemary Davies-Janes |
Do you know the profit margins of
your various products and services? What was your total revenue
last year? What are your projected profits this year? By how much
is that an increase or decline from last year's profit? What are
your monthly operating costs? What are your annual expenses? How
much must you reserve/pay each month in business taxes? How much do
you allocate for monthly expenses?
It may surprise you to learn that many business owners or
professional practitioners can't answer one let along all of the
above questions. They track revenues and expenses for accounting
purposes but don't often "play" their numbers to seek out new
efficiencies or increased revenue streams They meet expenses as they
arise and then wonder why they never have any cash flow...
Opportunity knocks but they cannot answer as they are temporarily
(or chronically) short of cash!
To understand the role of cash flow in your business, you'll need to
examine the "flow" of your assets and liabilities. The length of
time between your payment of expenses ( payables) and your
collection of revenue (receivables) is the cash flow cycle . The
"cash flow crunch" occurs when your purchases have been paid for and
payments has not been received from sales you have made to your
customers. During this "crunch" your business' funds are unavailable
for other purposes. Short-term financing may help you continue
business activities during the "crunch", however, financing can be
costly. By "playing your numbers" well you can minimize the "crunch"
and maximize the "flow" by taking advantage of deferred payments on
your "payables" and encouraging rapid payments by your clients. How
might you do this?
1. Offering a small (2%) discount to clients who submit payment
within 10 days may be less costly than the cost of financing their
account for 30 days.
2. A surcharge for late payments can also be an effective motivator.
To ensure good client relations, it is helpful to include the
surcharge schedule in your "terms contract" when the customer's
account is opened, and to obtain their written agreement to abide
by this condition)
3. Selling on credit generally attracts customers and increases
sales volume. Yet there are costs connected to granting credit which
must be weighed against the potential benefits. To develop a
successful credit policy you must ensure that the cost of extending
credit and the potential risk non-payment and collection actions is
amply covered by additional profits from the increased sales volume.
Your business' profitability relies on your ability to sell your
products or services for more than it costs you to produce or
deliver them. Tracking your business operating expenses, your
production and delivery costs as well as your incoming revenue will
enable you to calculate the profitability of each product or service
you sell. By knowing your numbers, you can play them, well! Start
by comparing your pricing to that of your competitors and, depending
on what you learn, you might want to consider...
1. Increasing your selling price and investing the surplus margin
into a campaign to drive greater sales volumes, or, target new
markets, or, develop complementary "spin off" services or product
line "extensions".
2. Dropping your selling price into the competitive "ballpark" by
lowering costs through increased production efficiencies which allow
you to maintain or even increase your profit margin.
The possibilities are unlimited when you balance your "visioning"
with equal measures of creativity, innovation and number-playing
business savvy.
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