Combating your chronic cash flow crisis, part 1

Rhondalynn Korolak is presenting “Combating Your Chronic Cash Flow Crisis” at QuickBooks® Connect; here’s part of her presentation. Read part 2 of this article here.

Can you see order in chaos? Do you find it easy to identify patterns and make connections?

Patterns and trends are extremely helpful in business because they can assist you to find insights that are lost, solve problems, or predict what will come next.

And knowing what will come next is really very helpful, isn’t it?

It can help you to plan more effectively, spend resources wisely, and avoid costly mistakes that hurt your cash flow.

I would like to share a story with you that I think you will find fascinating and relevant on two different levels …

Recently, a 15 year old Canadian student named William Gadoury became headline news for discovering an entire ancient Mayan City – simply by looking at the stars on Google Earth in his bedroom.

Three years earlier when William was only 12, he became interested in Mayan civilization. As he began learning and delving into history, he began to question why the Mayans built their cities far away from rivers, in remote areas, or in the mountains.

This inquisitive nature led him to begin studying the patterns of the cities and 22 Mayan star constellations. He immediately saw some links, and when he superimposed the constellations over a map of the Yucatan Peninsula, they lined up perfectly with 117 ancient Mayan cities.

He also discovered that the brightest stars linked up to the largest cities. In fact, he was the first person in history to make this connection. He then noticed that one of the constellations comprised of three stars, correlated with only two known cities on the map. So, he hypothesized that there might be an undiscovered (hidden) city in the third spot.

He then contacted the Canadian Space Agency, who arranged for satellites from NASA and JAXA to provide aerial shots of the exact location where William thought the lost city might be.

Expert scientists were literally blown away when they found evidence of a previously undiscovered large, 86m high pyramid and 30 buildings exactly where William predicted the city would be.

Here’s my question to you: If a 12 year old can discover an entire city lost in the undergrowth simply by examining the stars on a map in his bedroom, what could you discover by looking more closely at your financial results and your cash flow?

Where do patterns exist and what can you glean from them?

You might be somewhat shocked to discover that there is a valuable pattern (a mathematical relationship) between your sales, profit, and cash flow.

Unfortunately, if you don’t see and change the trend in the relationship between sales, profit, and cash flow, you will continue to have poor cash flow.

Let’s examine the relationship between these three numbers and some steps that you can take today to identify issues and fix them.

Here is a simple example …

• Sales $250,000
• Profit $ 50,000
• Cash flow $ 10,000

What is the relationship between these numbers?

Let’s take a deeper look at the pattern …

If you boil it down and simplify the math, you will discover that for every $1 in sales, you have $0.20 in profit and $0.04 in cash flow.

But is $0.04 (per $1 of sales) enough to pay taxes, your salary, and the ongoing operating costs?

The simple answer is no.

With $0.20 in profit for every dollar in sales, you would probably owe $0.08 in taxes alone, plus you have to keep paying all the other the bills to keep your company afloat.

So what if you went out, spent a whole lot of money on PR, advertising, or social media and doubled your sales? Would that make a difference?

Would more customers fix your cash flow problem?

Here is what your new (improved) numbers would probably look like:

• Sales $500,000
• Profit $100,000
• Cash flow $ 20,000

Granted, you have boosted sales significantly, but remember, it’s expensive to find new leads and close more sales. In addition, you will now owe $40,000 in taxes on that $100,000 in profit, which is a lot more than you generated in cash flow ($20,000).

And, when you boil it down and simplify the numbers, you’ll quickly discover that the relationship between the three numbers really hasn’t changed. You’d still have $1 in sales, $0.20 in profit and $0.04 in cash flow. All you have done is make your overall position worse, because you now need to unlock even more cash flow to fix the situation.

Contrary to what you’ve been told, you don’t actually need a fancy spreadsheet to predict your cash flow with a reasonable degree of accuracy – you just need to understand the relationship between these three numbers in your business.

Once you have identified what the relationship (or pattern) is between your numbers, you will be able to assess whether your business is healthy and viable. And if it isn’t, it means you need to focus this month on getting your business model right which will put you in a much better position to assess what you need to do in order to grow profitably and safely.

If you currently earn only $0.04 in cash flow for every $1 of sales and $0.20 of profit in your business, you need to know that you have this problem today so that you can change the way you are operating your business.

Fixing it is now your number one priority.

Take some time out today to review your sales, profit, and cash flow figures, and discover the pattern that is keeping you from being able to pay the bills each month as they fall due. If you don’t find the time to do it today, you could easily be missing “the gold” or hidden treasure in your business.

And remember, if a 12 year old with no previous experience in geography, archaeology, or astronomy can discover an entire lost city in the Mayan jungle, just imagine what you could uncover by looking more closely at your financial results.