Do you have financial freedom?
Almost everyone is looking for more freedom in their business. More specifically, Financial freedom, Time freedom and Mind freedom.
Financial freedom is having sufficient cash flow for the you, the business owner, to have the lifestyle you desire. You can rest easy knowing you have enough cash in the bank to pay the bills, grow the business, take that holiday or save and invest for your future.
Your business should deliver the cash flow you need and the time for you to enjoy it.
Financial Freedom
Financial freedom is about having the right cash flow to sustain the business and to fund your desired lifestyle.
Let’s start by asking some questions to assess your current level of financial freedom:
- Do you have a general idea of your cash position on a day to day basis?
- Are you confident your business has enough cash to pay bills as they fall due?
- Do you prepare an annual Cashflow Forecast?
- Do you regularly monitor your results?
- Do you have access to regular management reports?
- Do you ever wonder why your profit figure is so different to your cash position?
- Is your business currently delivering enough money for you to live your desired lifestyle?
If you can answer yes to all of those questions, you have probably achieved financial freedom. But, if you answer no or you’re not sure, then you probably find yourself worrying frequently about the financial health of your business.
Achieving financial freedom requires growing your business profitably whilst managing cash flow. Growing profitably comes through growing sales and profit margins. There are essentially 7 ways to grow your business:
Sales are increased by:
1. Increasing customer retention rate i.e. keeping more customers
It’s much cheaper to make sales to existing customers, in fact statistics show that it’s six times easier and cheaper to make sales to existing customers than it is to new customers.
What are you doing to delight your customers and make them want to return to you? Do you know what is your customers want? What is your current communication strategy with your customers?
2. Generating more leads
When someone responds to our marketing or makes an enquiry, they become a lead. It’s important to follow your leads up and give them an opportunity to buy, moving them from being leads to being prospects. At this point, we move from the lead generation phase to the sales phase, and our prospects become our likely customers. After a single purchase, they become our customers, and after repeated purchases they become our loyal customers. Finally, we want to get our loyal customers to become raving advocates who tell everyone about their experience with us and generate referrals.
We want our leads to be the right type of customer for us. Who is your target market? Where are they in the highest numbers? You need to understand this in order to tailor your marketing to the right people.
3. Increasing conversion rate
Are you measuring your success at converting leads, quotes and proposals to sales? Do you regularly review why you aren’t converting more of them?
Are there stand out performers in your team who have a higher than average conversion rate? Are you using the right people in the sales process?
When you deal with customers are you dealing with the decision-makers? Don’t deal with gate-keepers, get straight to the people who can make things happen.
4. Increasing transaction frequency
As mentioned above, it’s much harder to sell to new customers than it is to sell to existing customers. It makes sense then to encourage existing customers to buy from you more often.
5. Increasing average transaction value
Increasing transaction value doesn’t necessarily mean increasing your prices. How can you add more value to your customers? Do you give them a range of options? Do you make it clear what you are offering? Don’t assume they already know – ask them! Follow the ‘would you like fries with that?’ concept and adapt it to your business.
Profit margins are increased by:
6. Reducing cost of sales/variable costs
The sixth way to grow your business is to reduce your variable costs. These are the costs which increase as sales increase such as materials, stock purchases and direct labour costs. This is about buying more effectively, negotiating better terms with suppliers, making better use of systems to monitor materials usage and record time with the aim of identifying and reducing wastage. rework and inefficiencies.
7. Reducing overheads
Overheads are your fixed costs, e.g. telephone, insurance, power, bank interest. How often do you review your overheads? It’s common as a business grows for overheads to increase. That is not necessarily a negative so long as they grow in a controlled manner.
Turning profit into cash
The link between profit and cash is known as the Working Capital Cycle. Although upfront payment and large deposits are becoming more common, you will probably have a gap between making a sale and collecting the cash. Even for a retail business collecting cash at the point of sales, there is likely to be a gap between paying the supplier for stock and selling that stock to a customer.
The cash conversion cycle
Let’s look at an example of a wholesale business buying stock from suppliers. On average, they must pay the supplier after 35 days. Stock takes an average of 65 days to sell and customers pay after 45 days. This means cash paid to suppliers takes 75 days to cycle back into the business i.e. 65 days stockholding + 45 days for the customer to pay – 35 days supplier credit = 75 days.
Reducing the cash conversion cycle is key to improving cash flow. Here are just a few ideas as to how you can improve your business cash flow:
- Make sure you have a robust process for collecting from customers and ensure you adhere to it.
- Communicate your Terms of Trade from the beginning. Contact customers the day their invoice becomes overdue. Be persistent with your contact and try different methods, for example, phone, email, and letters.
- Get credit references or personal guarantees from customers, set credit limits and require cash on delivery.
- Regularly monitor stock levels and get rid of obsolete stock.
- Ensure you understand buying trends so you can plan for quieter times.
- Create a personal budget and stick to the monthly drawings amount.
- Consider financing asset purchases instead of paying cash outright.
How does your sense of financial freedom stack up? Are you doing everything required to grow sales and margins and to convert sales back into cash as quickly as possible?
If any of this strikes a chord with you, get in touch with us now for a free, no obligation chat about where you could take your business.
