Today, we’re talking about something that often keeps business owners up at night: cash flow anxiety. It’s that uneasy feeling you get when payday is coming, bills are due, and you’re not sure if there’s enough money in the bank.
Why does cash flow anxiety occur, and what steps can you take to take control of your cash flow – so you can sleep soundly at night?
In this episode of Beyond the Numbers, Bev Wakefield breaks it all down, without the complicated financial jargon. If you’re constantly stressing about money – this episode is a must-watch.
Why Managing Money Matters More Than Making It
Running a business isn’t just about how much money you make – it’s about how well you manage what you have.
When you take good care of the money you have, it helps your business stay strong, grow, and get through the ups and downs with ease.
We once helped a business that was making great money one quarter, but they weren’t careful about watching what they spent. When it was time to pay their big tax bill, they were really stuck. This shows that having a lot of money coming in doesn’t mean you’re safe. What matters is how well you manage that money.
Common Reasons Cash Flow Issues Occur
Here at Vibrant Accountancy, we’ve found that a few common reasons why cash flow issues occur are due to:
- Not having a financial buffer
- Experiencing unpredictable income
- Dealing with late payments from customers
- Overspending based on current bank account balance
- Having little to no visibility over financial incomings and outgoings
Understanding and addressing these issues can help you maintain a more stable and robust financial footing.
Practical Steps to Control Your Cash Flow
1. Gain Visibility: Keep an eye on all the money coming in and going out using tools like Xero or even a simple spreadsheet. Separate your regular expenses (like rent) from variable ones (like supply costs) and note any unexpected bills.
2. Know Your Break-even Point: Understand how much revenue you need to generate each month to cover expenses. This involves calculating your fixed monthly costs and determining your gross profit per sale.
3. Create a Cash Buffer: Aim for at least three months’ worth of operating costs saved. This financial cushion can prevent cash flow dips from spiralling into crises.
4. Review Weekly: Set a time each week to review your finances, including upcoming bills and payments. It only needs to be as little as 10-15 minutes! This helps you plan ahead and make adjustments, like invoicing customers earlier or cutting unnecessary expenses. One client that we worked with made this a habit and quickly went from feeling stressed to being in control of their money.
Building Predictable Income Streams
A great way to reduce cash flow anxiety is to set up ways to earn money regularly, like with subscriptions.
This method helps you know how much money you can expect to come in every month, which makes planning your finances simpler and cuts down on worrying about making enough sales each time.
Let’s look at some examples of how you can make income more predictable:
- Front-of-Line Passes: Similar to fast-track passes for amusements parks, some companies offer priority service subscriptions. For instance, Salesforce.com allows basic support queries to be answered in two days, but with a premium monthly subscription, you can get a one-hour response time.
- Service Contracts: If your customers require your services repeatedly, consider a service contract. This saves them the trouble of having to call each time, and provides you with a consistent revenue stream.
- Sunk Money Subscriptions: This model involves a combination of an initial investment followed by a recurring subscription fee. Purchases like National Rail Cards, for instance, combine an initial investment with an ongoing subscription fee, ensuring continuous use and renewal.
- Auto-Renewable Services: In this setup, services are structured to renew automatically, creating a seamless continuation of the service without interruption. Cloud storage services, for instance, often operate on an auto-renewal basis, where customers are subscribed indefinitely until they opt out, offering a seamless recurring revenue.
- Consumables: If you sell consumable items, give customers the opportunity to subscribe to receive shipments at regular intervals, ensuring they never run out (and you keep generating regular sales). Innovations in recurring delivery services mean even items like razors or nappies can be subscribed to.
Even industries that don’t typically use subscription models can find creative ways to generate steady, recurring income.
Look at the examples above for inspiration and think about how you could use a similar approach in your own business.
By building predictable income streams, you’ll spend less time worrying about making one-off sales and more time focusing on growing your business.
In Conclusion
It’s clear that easing cash flow worries is all about getting smart with your finances. Keep a keen eye on your cash, stash some for a rainy day, and make sure you’ve got that steady cash coming in – think subscriptions and services that keep the pounds rolling in regularly.
By getting this mix right, you’ll shift from biting your nails over every sale to cruising along, watching your business grow.
So take these tips, tweak them to fit your business, and start sleeping better without those cash flow nightmares.
Transcript
Welcome to Beyond the Numbers, the podcast where we take the stress out of business finance and break down the numbers in a way that actually makes sense. Today we’re talking about something that keeps business owners up at night: cash flow anxiety.
You know that feeling when payday is approaching, bills are due, and you’re wondering if there will be enough cash in the bank. You’re not alone.
Today I’m going to walk you through some practical steps to take control of your cash, avoid those nasty surprises, and stop that constant money stress.
First, let’s acknowledge that cash flow anxiety is real. It’s one of the biggest financial stresses for business owners. But why does it happen?
Common traps that tend to lead to cash flow stress are not having a financial buffer. So actually living month-to-month with no safety net. Another one’s unpredictable income. So you might have feast or famine revenue cycles where some months are absolutely booming and others are slow.
Another impact can be late payments from customers. So you’re owed money but you don’t know when it’s actually going to hit your bank account. A really common one as well is actually when people overspend based on their bank account.
So instead of planning based on their future cash flow, you’re looking at the bank and making decisions based on the money that’s sat in there and also a lack of visibility.
So not knowing what’s coming in and what’s going out. So no cash flow forecast that’s been built and looked at. So decisions are really being made in the moment without looking ahead. And this can have an impact of surprise tax bills VAT, PAYE, corporation tax. So if you’re not setting money aside these really hit hard.
So a business that I worked with once had a fantastic quarter but they weren’t tracking their outgoings. They spent far too much and then the VAT bill came. So cash flow anxiety isn’t about how much money you make, it’s about how well you manage it.
So how do we manage it? How do we regain control of the cash flow? So a simple framework I tend to use with some of our clients is to get visibility first. So track your incomings and your outgoings properly.
Use a software like Xero or even a spreadsheet. Start by categorizing your expenses. Which expenses are fixed so they don’t move, they’re the same month in month out, and what costs are variable.
So these perhaps alter dependent on your sales. And then look at the other costs that perhaps creep up unexpectedly.
And the next step really is to understand the break-even point. So how much do you need to bring in each month to stay afloat. So let’s look through an example on the flip chart. So say we have monthly fixed costs of £5,000.
This includes everything from rent, salaries, and insurance on a monthly basis. Now what we’ve got to try and work out is what the gross profit is per sale. So we need to look at what our sales price of each item is. So say it’s £100 and we know that we’ve got variable costs. So the costs that are directly influenced by those sales of say £40.
So this means we have a gross profit per item of £60. So to work out our gross profit margin we need to take that £5,000 and divide it by £60 which gives us our total number that we need to sell, which is 84.
So step two: this is to have a cash buffer. We want to aim for at least 3 months of operating costs. Now this can be a really good rule of thumb. Start with a mini goal though.
So maybe start saving up towards at least 1 month’s worth of expenses to start with. This buffer just stops those cash flow dips turning into full-blown crisis or very expensive borrowings.
And then step three is just checking in more often. So maybe having a Friday money check-in, setting a weekly cash flow review and looking at what’s due next week, next month, and next quarter and adjusting your spending and invoicing accordingly.
Now once you’re kind of forecasting on a more frequent basis you’re then able to look at the month by month to see whether there are any dips that you need to be concerned about.
A client of mine started doing this 10-minute Friday money check-in every week.
And just by regularly reviewing their cash flow, they went from constant money stress to knowing exactly where they stand. So when you have the visibility, cash flow stops being scary. It’s because it becomes something we can plan for.
So do you want to know one of the best ways to reduce cash flow stress? It’s to build predictable income streams. And one of the easiest ways to do that is with subscription income. And why does subscription income help cash flow?
It’s because getting steady income instead of those feast or famine cycles that reliable recurring revenue, it means it’s easier to plan financially and it’s less reliance on one-off sales, so you’re not having to start from zero each month.
A service-based business that I worked with started to introduce a monthly membership option for clients instead of just relying on those one-off sales. And within 6 months they had a reliable baseline income that covered their fixed costs, reducing those cash flow worries massively. So in effect, subscription income gives you that breathing room. You can focus on growth instead of chasing money.
So I want to go through some different subscription models. There’s loads of different ways to get recurring revenue. An initial one is a sunk money consumable. Think about something like Nespresso.
You have to buy the initial Nespresso machine and then you’re required to buy the pods that fit in that machine. It means you’re going to be buying those on a more frequent basis, something that was a consumable. And also subscriptions are great.
Think about the 3-month subscriptions to apps such as Calm or even to a magazine. And you can also get something called a sunk money subscription as well.
So you invest upfront, but you’re also paying for an ongoing subscription. So these are things like the National Rail Card are great examples of this, a mobile phone where you pay upfront for a handset and also auto-renewal subscriptions are even better because they keep rolling on, so you don’t have to worry about getting someone to sign up for another 3-month subscription or 12-month subscription.
They’re just there until you tell them to turn them off. And a great example of these are things like cloud storage.
And then the last one I wanted to touch on are the long-term contracts. These are the contracts where we’re creating and saying that we’re going to do a service for a client for a longer period of time. It’s not something typical in our industry.
This is something that I hear quite a lot. You know my industry naturally doesn’t lend itself to recurring revenue. It’s not something that we used to do. Quite a few years ago we would never expected things like beauty products like foundations or perhaps flowers to be on a subscription basis.
These are things that are starting to shift and would definitely have never been considered normal in those industries. So there are so many different ways that you can look at creating recurring revenue and I want to touch on a few more. So maybe think about simplifying things.
So if your customer knows that they’re going to need your service regularly, start establishing a service contract which simplifies their life by eliminating the need for them to remember.
They don’t even need to call you to perform the service. Another great example are front-of-line revenues. We’re all used to fast-track pass for a fast track to get to the front of the queue for the roller coaster.
Companies are doing things like this as well now. So think of salesforce.com.
They use the basic levels of support means that someone will get back to you with your query within 2 days.
However, if you want a faster response, you can subscribe to a monthly service plan, the premier package which means that you actually get a 1-hour turnaround time. And then the last model is the consumable model. So we now know that we can all buy razors on a consumable model.
Life’s too short to worry about mundane tasks like remembering to pick up nappies or razor blades. The whole thing here is subscribe and then you’ll never run out.
So really start thinking about what industry you’re in and which of these recurring revenues may apply best for you. Next episode is about pricing mistakes and how these are damaging your company.
