The Best Question to Ask a Business Mentor about Improving Cash Flow
Posted by Tim Stokes on November 25th, 2020
Having your own business mentor can be wise decision for your business. There’s an infinite amount to learn about growing your business so why not access someone with ten or more years of experience instead of trying to learn it all yourself?
You’ll find business mentor in Brisbane if you live in Queensland, or in Sydney if you live there. They can be from your country or another one, it doesn’t matter much where they are from.
The number one challenge in business tends to be cash flow, or more importantly, surplus cash in the bank levels.
Everyone would like to see more cash in their business bank account so how can a business mentor assist with achieving that?
First of all it’s important to understand the two different aspects of cash flow versus cash in the bank levels as they are two different things.
Let’s say there are two identical service businesses, except for when they ask to be paid.
One service business operates with being paid upon commencement of the service, that generally takes a week to complete and let’s say the second business invoices at the end of the service work, but on average has to wait two weeks to receive the money.
The first business will have far better cash flow and cash in the bank levels, because the cash comes in three weeks sooner than the second business. Effectively, it will have three weeks’ worth of sales income in the bank more than the second business. It has better cash flow.
From this example, cash flow is better due to pricing policies and this is one area you can consider for your own business, if you have that opportunity. In many industries it isn’t possible to change payment terms, to be paid in full up front. If you can in your industry, you might like to consider a change in terms, such as a deposit up front, or all of the money up front from the sale. There are many businesses that operate at both ends and everything in-between of the payment timeline.
Being paid sooner, by reducing what some call the Average Debtor Day figure improves cash flow and cash in the bank levels, but there’s another way to significantly increase the cash levels in the bank.
Cash levels in the bank do not change the profitability of a business, which can be called the Operating Profit Margin or Net Profit Margin. This is the percentage of Operating or Net Profit on revenue that the business operates with, generally measured over a year.
A very effective way to increase the cash levels in the bank is to increase your business’ Net Profit Margin (NPM).
For the majority of businesses with 5 or more employees it is generally under 10%. If it was say 5% then the net profit of the business is 5% of the revenue.
If a business has 0,000 revenue with a net profit of ,000 that would be 10% NPM.
If the business can increase the figure from 10% to 15% then the business would have 50% higher net profit, which using the same figures would be a net profit of ,000 on the revenue of 0,000.
One of the primary goals of management of a business is to increase profitability. Profitability can be increased in a business two ways…
Reducing expenses or overheads will also increase the NPM of a business.
Increasing the NPM is a management skill that a lot of business mentors have in their repertoire.
If you have a business mentor or are going to look at having one in future then ask them about increasing your business’ NPM.
The NPM is like a measure of the efficiency of your business from leads to sales and ROI from advertising, to the ability to carry out work by employees and keeping overheads down as revenue increases.
Increasing efficiency is a different way of thinking and it is was easy then every business would have loads of cash in the bank and there would be fewer failures.
Ever heard of a business failing, while it had loads of cash in the bank?
Business failures are caused more by running out of cash than anything else. But is it a cash flow problem or a cash in the bank level problem that causes the failure?
Failure is more due to cash in the bank, primary caused by the business having a low NPM. Yes a lot of businesses also fail due to a decrease in sales, but a low NPM will cause low cash levels in any and every business because there’s so little profit on what’s being sold.
It’s not uncommon for businesses to increase the NPM, without spending anything more on marketing. What’s the opportunity for improving your business’ NPM? Ask your business mentor that question too!
Where you’re looking for a business mentor in Sydney, Melbourne or New York City you’ll find them in every major city in many countries of the world.
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About the AuthorTim Stokes
Joined: November 24th, 2020
Articles Posted: 2
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