Your business cannot survive on profit alone
A business showing a profitable result but having difficulty paying bills on time is already displaying early warning signs that franchise systems can often miss or misread. Recognising if the cash flow is sufficient to meet all business and dependent personal expenditure is critical in business survival.
Cash flow is really the fuel that underpins business sustainability and can be a lead indicator of problems with either the business management or model.
The signals are always there and often there are several months before the symptoms start to have an impact.
So what do you look for in your group?
Royalty/Marketing Levy - late payments
Supplier payments slowing (do you have a reporting arrangement?)
ATO – BAS and Super (check integrated client account)
Rental Arrears (Do you hold the head lease?)
Credit Cards – dependency increasing
Seeking or delaying temporary overdrafts
Selling Assets.
Beware - Cash Flow can be stemmed by Cash Impacts.
There are primarily five Cash Impacts. The five core cash impacts are the factors that really affect the ability of the business to generate cash.
Unfortunately, we consistently see many business operators that don’t fully appreciate or know why or how these factors impact business. Ask yourself the question.
What are the core cash impacts?
Sales; Margin; Operating Expenses; External Debt/Obligations; Cash Swing Factors…how many did you know?
Let’s look at the impact a little closer for each one:
Sales – Your Thrust in business is Sales. Assess sales trend history. Are sales declining, stagnating or are they growing?
Margin – There is no point in getting an increase in sales without the lift in the business, and the lift comes from Gross Margin. Under stress, the temptation is to increase sales but by discounting, which actually impacts the margin.
Operating Expenses - (or the cost load in the business). Is the business adjusting to the changing market or is the business reluctant to adjust staffing levels or other variable cost structures to keep costs at a sustainable percentage of the revenue?
External Debt/Obligations - the drag in the business is the demands that the owners or franchisees are placing on the business to meet their own personal commitments, lifestyle, and any ATO arrangements.
Cash Swing Factors - The fifth factor in addition to the Four Forces is the Swing Factors, or simply the variables that are causing timing differentials in cash receipts.
The primary cash drivers are sales and the margin made on those sales over the operating and personal expense load attached to the business.
However, the swing factors comprising debtors, creditors, inventory and capital account movements are all balance sheet items and would not be part of the review if you are only using profit and loss. Therefore without the balance sheet, you will never be able to gain a full picture of the true cash flow position and the impacting factors.
Assess the true viability of your business and the four key gateways your business needs to step through. Our Business Viability Report will calculate your waypoints to ensure a successful journey with a rewarding destination.