TSH 17: Why your business keeps running out of money

Reading time 2 mins

Well, the short answer is that you're spending more than you're making.

Read on though, I get a little more insightful than that...

We've all been there

It's not uncommon to have cashflow struggles when you're in business. Whether you're just starting out, or doing $3m a month in sales, one thing you can be sure about, is that at certain times, you'll be on troubled waters. 

I would say that more than 50% of the businesses that reach out to me for support, would be in need of a turnaround - so you're not alone.

Usually struggling means running out of money, or recording continued losses - which may seem like the same thing, but it's not - you could actually be profitable on paper but never have enough money in your bank account (if this is you, you're probably over spending on stock).

Sales, the false profit

It's important to remember, that 99% of the time, increasing sales is not the solution.

The reason for that, is that we are often already maxing out our sales efforts, through spending lots on marketing, or discounting heavily, and we've basically exhausted many of the quick levers. That's not to say there aren't ways to increase sales, but they're generally slower moving strategies, and when you're in financial trouble, time is of the essence. 

So when a business is struggling for profit, or for cash, there are two possible solutions:

There are two ways to increase profits:

1. To increase full priced sales

2. To decrease costs

There are also two ways to increase cash:

1. To increase sales

2. To decrease costs

So, which strategy do I prefer?

Cost control

One of my favourite sayings is to control the controllables, and in that means your costs. 

The idea is that costs are easier to manipulate than sales, yet sales are the thing that most of us turn to when we're in trouble. We can't control our sales - we can try, but how often are we disappointed in out sales? A lot. We can control our costs.

So when you're bank balance is dwindling, you're faced with two options:

1. To go on sale

2. To cut costs

Option 2 is the better option; There is almost always fat to be cut of operating costs, whereas I cannot say the same for gross margins - usually the opposite actually. 

In other words, if you cut costs, like rent, or wages, or stationary, or entertainment - whatever it might be, that has the double whammy of improving your cashflow and your bottom line (your net profit). If you go on sale, you get the cash, but you probably don't improve your bottom line as the dollars coming in are at a discounted margin. You also do long term damage to your brand by going on sale whenever you need cash, whereas cutting fat out of your operating expenses actually leaves you with a better business. It also doesn't solve the problem long term, it's a Band-Aid solution, so you're just cycling through the same scenario over and over.

Now, I am well aware that the above strategy is ideal, and that sometimes you're desperate. So if you need to go on sale, try and keep it to Grade C stock; Grade C stock makes up 5% of your rolling thirty day sales - you can check this in your ABC analysis in Shopify. 

Long-term strategy

For a business going through cyclical phases of low cash, or needing to go borrow to keep going, here are the steps I would take:

1. Take a one off hit - get your inventory down to no more than 12 weeks cover. This means, enough stock to last for the next 12 weeks worth of of sales. Traditionally, this is when retail brand should go on sale, not when the market tells us to. Bring that cash in to the business once, and once only. Target your Grade C stock, and because that's your slowest moving stock, it's likely you'll have to cop a bit of a hiding on this sale - but that's ok - just once. If you are having cashflow issues, most of the time, you're over stocked. 

2. Once you're at 12 weeks or less worth of inventory cover - keep it there. You do this by only buying enough stock to maintain your target cover - let's say 12 weeks.

3. Aim to get your operating costs as close to 30% of sales each month as possible - ideally less. Here are some basic ratios to get you thinking:

• Paid media as a percentage of sales at 15%
• Wages as a percentage of sales at 10%
• Rent as a percentage of sales 1-2%

4. When you buy stock, spend your COGS x your planned sales. If your COGS are 30%, and you are expecting to make $100k next month, then you need to spend no more than $30k on stock. A reminder on how to do that here. 

If you stick to these basic rules, and you can execute on them, you should start to turn your business around,

Know your numbers

Remember, if your operating expenses, plus your stock purchases, are greater than your sales, then you will fall into a cash deficit. The key is, you need to make sure you don't - that means, if you don't know your numbers before the month, you are playing very high risk stakes. You need to know each month whether you are generating a surplus or deficit in your business, and get in control of that. Sticking to the basic four rules above will help you do that.

Finally, you can't buy that Ferrari, get that holiday house, fly your family overseas, or live that life you dream of with sales - it's cash that pays for those things. 

If you're reading this and you're at the very end of your tether, remember this: Administrators have the easiest job in the world. If your business goes into administration as a result of insolvency or potential bankruptcy, I can guarantee you what the administrator do to get your business solvent.

1. Cull your slow moving stock

2. Cut your costs to be as lean as possible.

Let's not wait for that moment, you know exactly what they are going to do, so why not get on the front foot and do it yourself.

Until next time,

Paul

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