Growing a small business has often been described as raising your first child: daunting and unpredictable. However, unlike raising a child, there are formulas and principles to help you on your small business journey, and we want to show you how.
Growing your business relies on two separate capabilities of the business, improving cash flow and increasing sales. Below I have broken down 7 key concepts between these 2 capabilities to help you understand where and how you can grow your small business.
Improve Cash Flow
There are many reasons why businesses can suffer from cash flow problems such as lack of profitability, arrears (taxation, rent & trade creditor) and negative capital buffer. Here are 4 key focus areas to help you improve your cash flow.
Cash flow forecasting is the act of estimating the amount of cash flowing in and out of your business. By predicting your cash flow, you can help your business make informed decisions such as whether to buy new equipment or to apply for that new loan. Performing a 13-week forecast entails estimating your sales (using previous sales figures), payments (receiving payments for your sales) and costs (fixed and variable costs).
After you’ve concluded your first cash flow, compare it to actuals. If they don’t quite match up (if you’re in deficit), it’s okay. You can use this information to adjust and take necessary actions such as searching for late payers.
Profit & Expenses
In order to generate cash flow, your business must generate profit. There are two main ways to generate profit, and that’s increasing sales or reducing costs.
When wanting to generate profit, you must look at both existing customers and converting leads into new customers. Are you willing to increase certain prices for existing customers? Are you maintaining beneficial customer/business relationships? Questions like this help you understand how you may increase profit.
If profit isn’t the easiest way forward, look at reducing business costs. Even if being utilised with generating profits, it is important for small businesses to review all expenses regularly. Are people within the business adding value? Are there expenses that can be lowered? In many ways, small businesses can benefit from small changes. Look into your expenses and see where you can decrease costs.
Another source of cash flow can be split into working capital and fixed capital.
Working capital is the amount of money being put in day to day expenses. This type of capital helps support the functioning of business operations. Ways to analyze working capital is to consider certain aspects such as stock movement and payment terms.
Fixed capital is the investment of the enterprise in long-term assets such as ‘plant and equipment’. Is there equipment in your business that is no longer required? Can equipment not being utilized be turned into cash flow?
The last area of improving cash flow is finance. In many cases, owners don’t know how much they are taking out of their business. Like all area’s of the business, owner distributions need to be reviewed to make sure they are sustainable.
Other important elements of financing are analyzing debt and security.
Are your debts structured?
Are the repayments of equipment too high?
To grow your sales effectively, you must be clear on your strategy, evaluate your opportunities, take the necessary key actions, and measure your KPIs as you go.
As a business, you need to understand who your target customer is and what your competitive advantage is. What makes you stand out from your competitors?
Having a set strategy in place helps you and your team work efficiently and generate profits.
Acting on business opportunities may not be something that grows your sales overnight. However, it can be a way for you to explore areas of your business and generate new ideas.
All these factors contribute to your total sales which is important to measure and evaluate. By measuring your KPIs, you can analyse what you’ve done right and plan what you need to do better.