You’re working like crazy and sending out invoices left, right and centre. However, the money doesn’t seem to be piling up in your bank account – why is that? Usually, it’s poor cash flow understanding and a lack of processes that leaves business owners confused about where our money is.
In order to know how much money you need to make to make a profit, you need to know the cost of producing your services – this is called the breakeven sales point. The breakeven is the point at which you’ve covered all of your expenditures, so you’re left with pure profit.
To work out the cost of producing your product or service, you need to take all of your expenditure into account. This might include materials, labour, rent, wages etc. Once you’ve documented all of these costs, you’ll have a better understanding of how much you need to sell in order to make a profit.
Timing your cash flow…
Cash flow is all about timing! If a load of bills land on your desk beforethat big invoice has been paid, you might be in a spot of bother. Poor cash flow is a big reason why one in every four businesses doesn’t make it past the first year. In order to combat poor cashflow and cashflow issues, you need to ensure a constant stream of income. This doesn’t mean you just have to sell more, you have to be savvy with your payments. Try to keep invoice terms as short as possible and try to invoice as soon as the work is completed. If you use suppliers, do the opposite. Negotiate the longest possible payment terms to allow for money to come in, before it must go out.
Preparing ahead of time…
Another reason that there may not be a build-up of cash in your bank account is because you aren’t preparing for big bills. Plan ahead and put money aside every month to cover taxes. If you save 20% of your earnings, you’ll always be ready to pay your tax return when it’s due. Failure to pay your tax return on time can result in fines and penalties – further damaging your pocket.
Putting your prices up…
If you’ve carried out the above steps and you find that you’re still struggling to make ends meet, you may simply not be charging enough. In order to work out how much your prices need to go up by, try calculating preparing a cashflow forecast with different percentages of prices increases e.g. 5% higher, 10% higher, 20% higher etc. You may not need to up your prices by much to see a return.
If you are genuinely working as many hours as you can, but you’re still struggling – something has to give.
The number one thing to remember when trying to increase profits, is the difference between profit and cash.
Cash = The money you make on sales i.e. the money that comes in to your bank account.
Profit = The amount left over after you deduct all of your expenditure and costs.
If your cashflow is positive, you’re bringing in more money than you’re sending out. If your cashflow is negative, this means you are making a loss and no profit.