The phrase 'Cash is King' is often heard in business circles, but it's not always the right mindset for your business. One of the first steps to working out your business strategy is took take a look at what stage of growth your business is currently in - are you in the early stages or are you a mature business? This will help to guide your next steps.
Cash is King: Early stage of your business
The first 3 years of business are often the hardest. Whatever you thought you wanted to do, whatever price you thought your customer would pay, whatever way you thought you would get your customer is often different out in the real world.
This phase of business growth is often filled with little experiments trying to understand your market, taking your product to market, letting the market know you exist. And this, is often expensive because there is still so much you just don’t know
- How much will your clients pay?
- What will it cost you to do what you say you will do?
- How much money is left to cover your other expenses?
- How much can you take out of the business?
- Where should you spend your marketing dollars?
- How can you streamline your delivery to reduce your costs and get things done quicker?
In this phase you may take on any customer you can find. Sure you have an ideal price you want to charge but really, you just want to prove that people want to buy your product, and you have bills to pay. Taking on customers at a lower price, often with higher costs of delivery (because you haven’t worked out what’s most efficient yet) means there is less cash in the bank. But you have to do it. You have to get something in the door. This is why in the first 3 or so years of business Cash is King.
Tips for times when cash is king
- Prepare a 3 year cash flow forecast before you start the business to ensure you are appropriately capitalised and to ensure you have identified all revenue sources and expenses
- Each quarter review the cash flow forecast
- Have access to emergency cash outside of your business
- Loans from your investors
- Take on a business partner if appropriate
- Sell shares to staff
- Loans from new fintech lenders like Banjo Loans
- Make decisions that encourage getting more cash in. A CFO can help you make better decisions and find the information needed to help you decide with insight rather than gut feel
- Negotiate upfront deposits from clients
- Don’t invest in glitzy marketing if you don’t know where your customers are
- Stay away from long term commitments
- Negotiate longer payment terms with suppliers
- Reduce debtor days
- Implement a debt collection strategy
Read more about 10 ways to cut costs in your business.
Profit is King: Mature Businesses
Cash isn’t king when you have an established business that needs to grow for you, profit becomes more important.
After around three years of business, you should have worked out how to do what you do. You should have steady paying clients and have a good handle on what costs are needed to deliver what you sell, as well as the costs needed to keep the lights on. Your cash flow should be strong with surplus funds in the bank to allow for seasonal changes in revenue.
This stage is about growing your business and making profit. Profit is a little harder to see though, it’s not like opening your internet banking and seeing cash in the bank. It is the measure that will help you sell for a higher price when that time comes and ultimately, if you get your profit up, you are in a better position to get more cash in over time.
Changing your focus from decisions that bring cash in to decisions that increase your profit could see you
Tips for increasing profit
- Only working with clients that bring in more profit and ending work with your less profitable ones
- Entering into longer term contracts that offer reduced total expenses in exchange for a longer commitment
- Taking advantage of discounts for early cash payments
- Consider traditional long term bank debt (that’s cheaper than fintech loans) to fund your growth from places like Judo Capital
- Achieving economies of scales and efficiencies
- Use a CFO to develop insights about your most profitable, staff, products, customers to help you focus on them and close the gap on less profitable ones.
Where to Now?
There is no clear cut position on which is more important – cash or profit. This is determined by the stage of your business and strategy. It is a matter of the right strategy at the right time. Even a mature business going through a transformation phase may revert to a cash focus over profit. Working with your CFO will help you determine the right strategy for your business.