There’s not a day that goes by that I don’t think of the most important lesson I learned in an accounting course in college. I can still remember the overhead transparency (yes, I’m that old) with the words “CASH IS KING” and the funny little clipart guy, with his cartoon face and balding head, holding a bunch of cash. At that time, my young naïve self thought, “well isn’t that cute and catchy? Of course cash is king.” But, REALLY… I had NO IDEA what that meant until I had lived a little… and owned my own business.
Healthy Cash Flow
Healthy cash flow is vital for your business’s sustainability. So, what exactly makes cash flow healthy? Here are 6 ways to achieve healthy cash flow:
Have a reserve of at least 3 months of cash
This is something to aspire towards. I know this is not always attainable. But, once your business is flowing, you should start hoarding cash like nobody’s business. Squirrel it away however you can. 3 months is also a minimum that I recommend. The primary purpose of this cash reserve? To get us through the slow months, whether it be slow from seasonality or an economic crunch, or a lack of creative mojo (hey – it happens!)
The wedding business is seasonable. In some parts of the country, the “slow season” is 6 months long. However long your “slow season” is, is how long of a reserve you should have. And, however much cash you need in that time (to pay the bills) is how much you should have saved.
A stream of sales and contracts
You should always aim to have a pipeline of sales at all stages of the process: the courting/wooing, the consultation, the contract, the invoice/payment, the delivery. By ensuring that you have clients sitting at each stage of this process, you ensure that you will have cash in future months. Don’t have any consultations on your books? Always Be Promoting. Don’t have any outstanding invoice to collect on? You’ve gotta get some contracts out the door.
Consider additional streams of revenue
Want more cash? Sell more. HA – not always as easy as it sounds. We all know this to be true. But, how about offering a different service or product, thus expanding your revenue streams? I would especially consider a service or product that brings your business income during the “slow season”. I would also consider developing a passive income stream… a service or product that generates income without you having to do very much to sell or service it. The only rule I have for this: stay true to your niche and your branding. Expand your offering, but do not become a jack-of-all-trades. Finding the right fit will bring more dimension (and money) to your business.
Avoid debt like the plague
There are circumstances where I would recommend taking on debt for your business. Those circumstances are FEW and FAR between (and ripe for another post)… and would require a well thought out plan for what to do with the debt and how to pay it back. I would also recommend debt to be acquired when you are planning to make solid investment that is going to bring you financial returns.
Why is debt so bad? Because it SUCKS up all of your cash. Your business may be very profitable and perform well, but if your company has debt, you’ll pay the bank before any of that money sees your pocket. You’ll end up paying the bank before the money can be invested in anything else: inventory, a new website, an employee, equipment, our yourself.
Maximize Inventory Turnover; Minimize Inventory Held
Don’t buy inventory if you can’t sell it. And, if you are going to take a risk, have a solid strategy in place. Yes, business ownership does require risks. And, sometime you do have to take a chance on trying something out. But try a little before you get into a lot.
Your goal with inventory should be to get it in the door and out the door as soon as possible. Yesterday, I shared a common inventory purchasing conundrum that stationers are always faced with:
250 envelopes at 10c a piece vs. 50 envelopes at 25c a piece
bulk vs. minimum
wholesale vs. retail
minimal cost per piece vs. minimal cash outflow
I’ve made almost 97% of my purchases with the former strategy: minimize my cost per piece, order bulk, and order wholesale. But, there are many times that the additional inventory did not get purchased by the next customer… and I sat on inventory. (I still sit on inventory.) Do not get me wrong: you NEED to establish solid relationships with your wholesale vendors. This is vital to the long-term success of your business. But, be strategic about how much inventory your purchase and at what cost. Some times it’s worth to buy smaller quantities so that you have a more solid cashflow and so that you aren’t sitting on so much hard-to-sell inventory.
Be Smart About Your Big Investments
Ahhhh… technology! Ain’t it amazing?! Apple can sell $1.7 million of a new release iPhone within three days. Everyone is chompin’ at the bit. We want it… got to have it. HEY – I’m right there with you… I want one too!
We do this with a lot of BIG purchases. We must HAVE the new release ___________ (insert your weakness here: camera, video camera, sound machine, phone, computer, printer, letterpress, and so on)!! We gotta HAVE it. It’s AMAZING. Am I right? Or, am I right?
But, we aren’t always smart about our big investments (these are called “asset purchases”). We buy them because we think that it will make us better a _________ (insert your field here: photographers, planner, videographers, stationers, and so on.) And, sometimes, they do give us an advantage. But often times, they don’t. And, often these purchases take a LOT of cash.
Be very strategic about your asset purchases. Will this new piece of equipment bring me MORE income? And, exactly how will it bring me more income? Is it just because I’ll appear fancier? Or, because my work will truly be worth more and thus, I can charge more? Or, do I just want it because… truth be told… I like gear? Be intentional with your big investments.
And… because I always want to get into the NUMBERS… let’s do it! Tomorrow, we’ll discuss cash flow planning… and I’ll have an AWESOME download available.
ppppppsssssttt… reach out to me if you need help with cash management. That’s what I do!