Cash flow is a critical concept that many entrepreneurs don’t fully understand. I believe this is because they usually hear about it from accountants that try to explain it in accounting terms. Poor cash flow is an operational issue. And, you fix it by tuning your revenue engine.
In the post “Cash Flow – An Entrepreneurs View” I explain the concept of the revenue engine and how it relates to cash flow. Finding your revenue engine chokepoints is the first step in fixing cash flow problems.
Most cash flow problems are caused by 1 or more of 5 things:
- Collections are too slow
- Operation capacity is too high or too low
- Not enough sales
- Your price is too high or low
- You don’t have enough leads.
Let’s take a little closer look at each of these cash flow problems.
This is a pretty simple cash flow problem to find. If you don’t get the cash for your product or service in a timely manner then you can’t pay your bills; have to finance your credit; and it cost you more to do business. If you get caught in this cycle too long it’ll put you out of business all together.
This is usually where the accountants get involved and tell you “you need to watch you’re accounts receivable (A/R) and how you spend your money and all that good stuff. But, even if you collect upfront or don’t have A/R problems you can still have cash flow issues. The remain 4 problems show you how cash flow is more than just a collection problem.
Too Little Operational Capacity
In the post “2 Things Can Kill Your Profit” I show how your operational capacity can impact your revenue, but let’s face it “realized” revenue is what we’re really talking about when we’re talking about cash flow!
If you have too much capacity, then you are spending money on resources that could be spending on something else. Thus you have an expense issue and don’t have the “cash on hand” to pay for the things you really need to be spending like marketing and sales.
If you don’t have enough capacity then production is slowing down the revenue flow. If your revenue is not flowing then you’ll have cash flow problems.
So, how much capacity should you have? That is depends on a few things. First, are you growing, shrinking, or just trying to maintain you current revenue levels? If you’re growing, then how fast are you growing? If the market is down or you are just trying to maintain that is a different story, but I would say stay between 50% – 80% of your capacitiy. On the low end look at cutting back on the high end make sure you have the capital to add more capacity or you should be create a game plan for how you will raise the needed capital to expand.
Not Closing Enough Sales
Many entreprenuers think you need to close 100% of the deals you get or something’s wrong. In fact, most sales professionals will tell you a 20% – 40% close rate is pretty good. If you are outside of this range your close percentage is telling you something.
If your close percentage is higher than 40% then your price is probably too low. I speak more to this issue in the next section.
If your close percentage it lower than 20%, there are a number of things that can cause this situation:
- Pricing too high
- Leads are not well qualified
- Sales reps need training.
Unqualified leads can be a killer of time for sales reps by spending time qualifying when they should be selling. This problem has its root-cause in marketing. It means you are talking to the wrong prospects or are using the wrong message to get people to call you.
If you have a mix of people that can close the leads in the accpetable range, but others that cannot, this would indicate a sales taining problem. Sales reps that don’t hit the mark need to be evaluated to deteremine if they understand your products and services or have the talent necessary to sell. Contact DE, Inc if you need assistance in evlautaing your sales team.
Price is Too High or Too Low
Pricing is another area where entreprenuers frequently struggle. If your price is too high not enough customers will buy. But, what if the price is too low? Now, the problem become you can’t afford to deliver or you aren’t making the profit that you need to make for the business worth the risk.
I would suggest reading my previous post “Avoiding Price Problems That Can Kill Your Business” to find out how to evaluate or fix pricing problems that might be causing your cash flow problem.
Underperforming Marketing – Too Few Leads
At the beginning of the revenue cycle is marketing. Marketing is a big problem for many small businesses. I believe the reason is because many small business owners don’t understand the real purpose of marketing – to generate leads for sales to close!!
There are countless ways to market a business, and with all the new social media tools marketing becomes even more confusing. New Marketing Lighthouse’s post “9 Ways to Generate Leads with Social Media” is a great primer to get started understanding how new marketing tactics can help if lead generation is the cause of your cash flow problem.
If you have a cashflow problem, how do you know the root cause? This can be difficult to diagnose without the right tools. A great tool to get a quick snapshot is the Revenue Engine Performance Checkup. It can help locate the chokepoints in your cash flow cycle so you know where to take a closer look and find the problem. Contact me if you’d like a FREE Revenue Engine Performance Checkup.