Today, I want to share with you a secret ingredient within your business that, once uncovered and fine-tuned, has the power to transform your business into a cash-generating engine.
Think of your business like a cash machine. It's either generating more cash for every $100 of new sales, or it's draining cash for every $100 of new sales. If the latter is happening, it means that as your business grows, you'll need to find more money just to keep it afloat. In essence, your business can't expand in such conditions.
We call this essential element your "Net Variable Cash Flow." It measures the extra cash that either gets created or used up with every $100 worth of products or services your business sells. When this Net Variable Cash Flow is positive, each additional $100 in revenue contributes to your cash reserves.
Before we delve into the nitty-gritty calculations, let me tell you about an exciting opportunity. By the end of this discussion, you'll learn how to access a comprehensive business financial analysis, a detailed financial report for immediate business improvement, and even a free coaching session. This session will unveil how you can significantly boost your cash flow, profits, and the overall value of your business – all at no cost to you.
Now, let's dig deep into the concept of Net Variable Cash Flow using a real-life example from a small business. Imagine Adam, who took over his father Frank's business. When Frank was at the helm, the business raked in $1,885,000 in revenue, boasting a $75,000 profit as he handed over the reins to his son.
Adam's tenure witnessed modest growth in the first year, with revenue climbing to $1,995,000 – a $110,000 increase. Unfortunately, profits took a dive from $75,000 to a daunting negative $75,000, signifying a $150,000 reversal from Frank's achievements. Troublingly, Adam's business found itself in a predicament with a negative Net Variable Cash Flow of $9.36 for every $100 of new revenue, resulting in a total cash loss of $186,887.
The alteration in the business model from Frank to Adam had a significant and unfortunate impact on the numbers. However, the silver lining here is the lesson we can glean: if a single-year change in the business model can cause such a substantial negative effect, the reverse – a positive model change – can be just as readily accomplished for your business.
Now, let's break down the Net Variable Cash Flow calculation you can use for your business:
Revenue – Cost Of Sales = Gross Profit Gross Profit – Working Capital ([Debtors + Inventory]) – Creditors]) = Marginal Cash Flow Marginal Cash Flow – Overheads = Net Variable Cash Flow
To affect a positive change you simply need to do focus on the following:
Increase revenue via price.
Increase revenue via selling to more clients.
Reduce Cost OF Sales as a % of revenue.
Increase Gross profit as a % of revenue.
Reduce your accounts receivable (debtors) number of days outstanding.
Reduce your inventory (stock) number of days.
Increase or slow payments to suppliers (creditors) number of day.
Reduce your overheads as a % of revenue.
When increasing revenue through expanding your client base, a positive net variable cash flow is crucial. However, success depends on whether the sales growth contributes to covering your overhead expenses. If your overhead costs are high and won't budge with new clients, this can be a challenge.
Onscreen you see the chart displaying a 5% adjustment in Adam's business across various aspects like revenue, Cost Of Goods, Debtors, Inventory, Creditors, and Overheads. Adam's business turned around from a cash deficit of -$186,887 (bottom-left corner) to a promising positive balance of $25,108. This change amounts to a remarkable cash shift of $211,995.
The 5% adjustments in each area involved minor policy changes and training for Adam and his team. These changes ranged from discontinuing discounts and emphasizing value to revamping quotations as Action Plans. Additional alterations included modifying deposit sizes, client payments, and supplier terms.
Notably, the business also adjusted pricing and acquired new clients, which contributed to a 10% revenue growth. This pricing shift influenced the Cost Of Goods, leading to an overall 7% change. The rest of the adjustments were in line with our targeted 5% changes. As a result, the business saw an impressive improvement in cash flow, increasing to $161,246, and a net positive change in cash flow totaling $348,133.
Your business can also benefit from working on these financial dials, and if your business is already positive then the improvements can be life changing.
If your business has been operational for more than 3 years and generates over $2 million in annual revenue, you qualify for an enticing offer – a comprehensive business financial audit, an in-depth financial report for immediate business enhancement, and a free coaching session aimed at boosting your cash flow, profits, and business value. Your voyage towards success begins right now.