3 Simple Steps to Growing Profit and Cash Flow

Adam LeanUncategorized

Frustrated.

This is the word that many business owners say when I ask them how they are.

  • They love their business and they work hard at it. Yet, the money doesn’t come in as fast as they want it to, and when it does, it is almost is never enough.
  • They feel like they are giving their blood, sweat, and tears to their business, yet they don’t feel like they have something to show for it.
  • They feel like they are on a hamster wheel running 90mph but never really going anywhere.
  • They feel like they are missing this secret business knowledge that the successful business owners seem to have.
  • They know that they are an expert at what their business sells (the products and services), but they feel inadequate when it comes to the business side of the business.

And they’ve done everything they can think of to help themselves.

They’ve read business books, listened to business podcasts, and taken business courses only to be left more confused about how to solve their business problems.

Small business owners simply want to know how to grow their business and succeed. Yet, they are more confused than ever.

I’ve read a ton of business books, listened to a lot of business podcasts, taken a lot of business courses, and even went to business school.

Want to know what I’ve taken away from all of that?

That a lot of these “experts” make small business confusing.

Way too confusing.

Especially when it comes to the “financials” of small business.

Endless numbers of books, courses, and universities have trained, and continue to train, people on small business finance. Most of what they teach sounds good, but it only works in theory, not in practice.

There are a couple of reasons for this:

Reason #1: Most of these business authors, professors, and so-called experts are people who have never run an actual small business.

Reason #2: Most of these business authors, professors, and so-called experts have a ton of experience in the corporate world.

First: Teaching business is not the same as running a business.

Second: Corporate life is not at all the same as small business life.

It’s no wonder that so many small business owners are frustrated! They’ve found little help regarding how to solve their financial business problems.

Small business owners’ confusion and frustration frustrated me, and that’s why I created The CFO Project. You don’t need a MBA to run your small business. What you do need is to understand a few basic business concepts.

And here’s the one concept that trumps all of the others. If you understand this one principle, your business will change forever; it will solve most, if not all, of your financial business problems: Having access to enough cash.

Having access to enough cash helps you:

  • …hire more people
  • …expand
  • …do more marketing
  • …go on a vacation
  • …pay off debt
  • …have more freedom

Now, there are three ways to get more cash from your business, but not all are necessarily wise choices for your business.

#1: Borrow it – When you borrow money, you don’t own it. The lenders want it back.

#2: Get investors – When you get investors, you must give a piece of your business away.

#3: Make a profit – Profit from your business turns into cash. Cash that’s solely yours; cash you own.

The #1 concept that sums up years of business training: The entire point of business is to create cash.

Cash equals freedom.

Cash allows you to reinvest back into your business.

Cash ensures that your business belongs to you and only you.

And, cash gives you the ability to give to others and to live as you choose to.

So, everything that your business does must be setup to do one thing:create cash.

Featured Resource I’ve created a checklist of five things that you must start doing (if you haven’t already) in your business that is guaranteed to grow profit. Click the button for FREE access to the checklist.

How to Create Cash

Think of your small business like a machine sitting in a warehouse. Your machine’s only function is to manufacture cash.

This is cash for you – the owner – after all debt payments and bills are covered.

Some machines produce a lot of cash, but too many machines out there are either barely limping along, or not producing any cash at all.

In fact, in many cases, business owners are going into debt to keep their machines alive.

There is no point in paying for or continuing to pour money into a machine that’s not functioning properly – meaning it’s not creating cash.

Everything you do in business must be geared around one thing: creating cash. This simply means making sure that more money is flowing into your bank account than is going out.

Here’s an analogy. Think of a garden hose. You turn the spigot a little and small amount of water flows out. You turn the spigot a lot and a lot of water flows out.

Your goal, with your business, is to turn your ‘spigot’ as much as possible so that the maximum cash ‘flow’ comes out.

It’s your job as the owner of your business to make that cash flow happen.

Now, there are three steps that you can follow to control the amount of ‘cash flow’ that you get from your business.

If you follow just any one or two of these steps you will either have no flow or a small amount of flow.

However, if you follow all three of these steps, you will have the maximum amount of flow from your business.

The Three Steps to Make More Profit and More Cash

Step #1: Make more Gross Profit than you did last year.

Step #2: Spend less than you did last year (as a percent of Gross Profit).

Step #3: Strive to collect 100% of your sales from your customers.

Step #1: Make more Gross Profit than you did last year

Sales minus all of the costs to make the sale (aka Cost of Sales) is your Gross Profit.

Here’s what I mean by that: If you own a pizza restaurant, say, and you sell a pizza for $10 and it cost you $4 to make the pizza, then your Gross Profit is $6.

So, your goal for Step #1 is to make more Gross Profit – not just more sales – than you did last year.

Let’s take a look at an example. This is what your restaurant’s Gross Profit looked like last year:

In order to follow Step #1, we need to make more than $60,000 this year.

You can do that by either increasing sales (to more than $100,000), or decreasing your COS (as a percent of sales).

Or, you can do both.

Here’s an example of the business owner who did both:

Notice that, although they spent more on COS in terms of dollars, the percentage of sales is less.

Step #2: Spend less than you did last year (as a % of Gross Profit)

Your Gross Profit less all Expenses equals your Profit (which turns into cash).

In Step #1, we increased Gross Profit. In Step #2, you need to decrease your Expenses (as a percent of Gross Profit) more than you did last year.

Your Expenses are all of the marketing, payroll, and other fixed expenses needed to run your business.

Let’s look at an example:

The Expenses represent 67% of Gross Profit ($40,000 / $60,000 = 67%)

In order to follow Step #2, we need to spend less than 67% of the Gross Profit.

Take a look at all of your expenses and ensure that each one is helping you to either make more Sales or more Profit. If you find that an expense is not, then there is no reason to spend money on the expense. You might as well keep the money you were allotting to that expense in your bank account.

Here’s an example of the same business owner who was able to lower their Expenses by $5,000:

Notice that they were able to increase Profit without changing Gross Profit.

Now, let’s assume that the business owner used Step #1 and Step #2:

Pretty significant, eh?

Step #3: Strive to Collect 100% of Your Sales from Your Customers

Not every customer pays what they owe you. This is one of the hard truths in business. This is especially true for service-based businesses because services are typically performed before the customer pays.

You can only make deposits once your customer pays you. You can’t take sales to the bank.

So, to really increase cash, you must follow Step #3. You must strive to collect 100% of what is owed to you from your customers.

Here’s an example of how your collections impact your cash flow:

In January, if you only collected 80 percent of what your customers owed you, then that means that you are spending COS and Expenses based on the sales rate of 100 percent, but you only have cash in the bank that covers the sales rate of 80 percent.

This is how businesses end up with negative cash flow. They spend more cash than they have without understanding why.

Someone in your business must be responsible for monitoring the “Accounts Receivable” report, by customer, and for following up with customers before their balances get out of hand – ideally before they are more than 30 days past due.

Keep It Simple. Here’s a Recap.

  • People make business seem more complicated than it really is.
  • Think of your business as a machine that creates cash.
  • The more cash you have the more you can do.
  • The more cash you have the more you can help your employees, your family, your community.
  • Your job as a business owner is to get your machine to produce more cash.
  • There are just three steps to make more cash:

Step #1: Make more Gross Profit than you did last year.

Step #2: Spend less than you did last year (as a percent of Gross Profit).

Step #3: Strive to collect 100 percent of your sales from your customers.

Featured Resource I’ve created a checklist of five things that you must start doing (if you haven’t already) in your business that is guaranteed to grow profit. Click the button for FREE access to the checklist.

How to Create Cash

About the Author

Adam Lean

Adam is a CFO and the founder of The CFO Project. We are CFOs who provide one-to-one coaching with small business owners. Click to learn more. Contact Adam at adam@thecfoproject.com