Updated: Feb 10
Cash flow is the number one challenge that small business owners face. SCORE, an organization that mentors small business owners, reports that 82% of companies fail because of cash flow issues. It does not matter how great your idea is, how much talent you have assembled, or how much the market needs your product; if you cannot pay your bills, you will not be in business long.
In this article, we will cover the top three activities you need to engage in monthly to ensure the profitability of your business.
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Cash Flow Activity 1: Expense Management
Operating cash flow is the movement of money into and out of a company over a time period. To fix your cash flow, you must start understanding your expenses. No matter how complex, all businesses have two basic expenses.
The fixed expenses are the expenses you must pay whether you serve 0 customers or +1000
Variable expenses increase as you serve more customers.Â
To correctly manage your cash flow, you need to define how much your business spends on existing fixed expenses such as rent and utilities and how much incremental expense you incur for each new customer you serve.
Example: An in-person mental health practice will have overhead costs for rent, utilities, website, and office furniture, regardless of the number of clients it serves. These are your fixed expenses. As the business acquires clients, variable costs like art and office supplies will be incurred.
 Key Terms:
Fixed expenses:Â are costs that remain constant regardless of the level of production or sales.
Variable expenses: are costs that fluctuate based on the level of production or sales.
Pro Tip: Work with a bookkeeper to set up your accounting software so that it is easy to see which expenses are fixed and which are variable. Segmenting your expenses will help you better predict future operating costs.
Cash Flow Activity 2: Forecasting Revenue
After you define and identify your fixed and variable expenses, it is time to shift your attention to revenue. One of the first things you will want to do is break down your revenue by type and source.
Type refers to what you are selling
Source refers to who is purchasing that product or service.
You should be as general or as specific as you need to be to make smart business decisions. Â
When it comes to type,
If you only sell a few goods or services, you can look at things at the item level.
If you sell a lot of different items, cluster them into categories.
Monitoring previous sales trends is one of the best ways to predict future revenue.
When it comes to source,
If you work with fewer than 10 customers, keep things simple and consider your business from the individual customer's perspective.
If you serve more than 10 customers, segment your customers into different types to make it easier to analyze your information.
Take the time to understand who is buying what, when they are buying it, and how frequently you believe they will be making additional purchases. This information will help you forecast future revenue.
Example: If you are a print shop, list the different types of products and services you sell. You will likely want to create categories such as paper products, promotional goods, signs, etc. Next, you will want to segment your customers into business versus consumer. Finally, you will need to create sub-segments inside of those two classifications. You can classify the sub-segments based on important variables, such as geography, industry, or another characteristic that will help you understand your most profitable customers.
Key Term:
Product categories:Â are groups of products that share similar characteristics and serve similar needs or purposes.
Customer segmentation: is the process of dividing a broad customer base into smaller, more manageable groups based on shared characteristics.
Pro Tip: Go beyond tracking your sales and track your prospects. By monitoring the top of your sales funnel, you can better predict the amount of future revenue your business will generate.
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Cash Flow Activity 3: Understand Buying Trends
All businesses are both cyclical and unpredictable. To correctly manage your cash flow, you must differentiate cyclical patterns, meaning ebbs and flows of revenue and expenses that you can predict from unpredictable ones.
To understand trends, you will want to review data based on different time horizons. If you have been in business for over a year, you will want to compare your performance this year to last year. Most companies will see similar revenue and expense patterns from one year to the next, and it is beneficial to understand how seasonality impacts your cash flow.
You will also want to look at revenue and expense trends by week. Some industries are impacted by customer cash flow throughout the month. Sales might be higher or lower during the first or last week of the month. You want to understand these trends so that you can plan accordingly.Â
Example:Â Individuals do their taxes every year around April 15th. Low-end retailers understand their customers and plan special promotions to capture additional sales during this time because they know many of their customers receive tax refunds around this time. Understanding how annual events like paying taxes impact customer demand is critical to accurately anticipating changes in revenue and expense.
Key Terms:
Cyclical buying patterns: recurring trends in consumer purchasing behavior that follow a predictable cycle over a specific period.
Time horizons: the time an investment, project, or plan is expected to achieve its objectives.
Pro Tip:Â Connect with other people in your industry. Ask them about their experience with sales cycles so you can determine if your business follows industry trends or is an outlier.
Summary
To wrap up, remember that healthy cash flow is the cornerstone of any successful business. Tracking and analyzing your expenses and income streams is a necessary monthly task. By understanding the patterns within your cash flow, you can gain financial awareness and improve it. If tracking and analyzing financials is no fun and drains all of your energy, look into hiring a bookkeeper or accountant who can fill this gap for you. If you have this but are still struggling, consider working with a business consultant or hiring a CFO. Your decision-making is only as good as your information management systems and processes. By organizing your revenue and expense data, making it easier to understand, and developing a routine around reviewing it, you will position yourself for better profitability.
Thank you for reading the latest installment of Your Path to Business Success series, designed to help small business owners make 2025 their best year. If this is your first time reading this article, we encourage you to go back and read the other articles in this series, which include topics on crafting a vision, goal setting, and conducting research.
If you have questions regarding any of the topics discussed or would like help implementing these tactics and strategies to your business, email executive coach Dorian Cunion at dcunion@yourpathexecutivesolutions.com
Go Deeper
Common Fixed Expenses
· Rent or Lease Payments: Costs for office space, warehouses, or retail locations.
· Salaries: Regular wages for employees, especially those on fixed contracts.
· Insurance: Premiums for various types of insurance, such as liability, property, and health insurance.
· Depreciation: The gradual reduction in value of fixed assets like machinery, equipment, and buildings.
· Utilities: Basic services such as electricity, water, and internet, which often have a fixed component.
· Loan Payments: Regular payments on any business loans or mortgages.
· Property Taxes: Taxes levied on property owned by the business.
· Software Subscriptions: Costs for essential software and services that are billed on a regular basis.
Common Variable Expense
· Raw Materials: Costs for the materials needed to produce goods.
· Direct Labor: Wages for employees directly involved in the production or service process.
· Sales Commissions: Payments to sales staff based on the volume of sales they generate.
· Shipping and Delivery Costs: Expenses for transporting goods to customers.
· Utilities: While some utilities have a fixed component, others can vary with production levels, such as electricity for manufacturing.
· Packaging: Costs for packaging materials used to prepare products for sale.
· Marketing and Advertising: Expenses for promotional activities that can vary based on the level of marketing efforts.
· Maintenance and Repairs: Costs for maintaining and repairing equipment, which can vary with usage.
Common cyclical trends
Seasonal Trends: Increased sales of winter clothing during colder months and summer apparel during warmer months.
Holiday Shopping: Spikes in consumer spending during major holidays like Christmas, Thanksgiving, and Black Friday.
Economic Cycles: Changes in purchasing behavior based on financial conditions, such as increased spending during economic booms and reduced spending during recessions.
Cultural Events: Increased sales of specific products during cultural or religious events, such as Diwali, Chinese New Year, or Ramadan.
