You’ll never find a company with positive cash flow and profitability in bankruptcy court.
Just won’t happen.
Let’s start with profitability. Whatever it is that you are selling, you have to be selling it for a/ more than what it costs to make and b/ more than what your overhead is. In other words, you have to have a bottom line that is in the black.
If you don’t, then that’s the first thing to fix by some combination of:
- raising your prices
- lowering your costs
- increasing your sales volume.
There are two major break points in your business model: the gross profit (your sales minus your costs of goods) and the net profit (the gross profit minus the overhead expenses.)
The gross profit has to be in the black, otherwise you’re not in business but running a charity. And your gross profit has to be enough to cover your overhead expenses to get you to a net profit that also has to be in the black.
So say you are profitable, but you find yourself in a negative cash flow situation from time to time. Let’s look at some possible reasons for this happening and what the fixes are:
- You manufacture a product or provide a service that require costs that you have to cover before you get paid by your customers.
- This is the easiest fix of all. Get some financing from a bank or from investors. More on what all you need to get “investor ready” in next week’s blog post.
- You have customers that are slow payers, so you’re making the sales, but the cash is slow in coming in.
- get deposits from your customers
- get serious about collections.
- You have a seasonal business and most of your cash comes in all at once.
- set aside a reserve account to carry you over the dry months.
- defer expenses and capital expenditures into months more flush with cash.
- You show a profit on paper, on your Profit & Loss, but you’re making lease payments on equipment or financing a line of credit.
- this is a marketing fix…you just have to get more sales volume, either more customers or sell more to the customers you have.
When it comes to maintaining a sustainable business, there are two things you need to have in place: profitability and cash flow.
When you’re wanting to increase your profits and balance out your cash flow, I can help you get there. It’s just a question of honing in on the particular area specific to your situation and applying the appropriate remedy.
Would love to hear about your current challenges in the comments below.