Cash Flow Problem #3: Losing track of your overhead costs
EXPENSES
Expenses can hide from you if you aren’t vigilant. For example, are you still paying for software subscriptions you’re no longer using? Doing a regular inventory of every expense can help you see where you stand.
Also, ask yourself: are you getting real value for what you’re paying? Let’s say you’re spending $100 per day on LinkedIn marketing. Are you getting market penetration, qualified sales leads, or direct sales out of it? If not, you’re throwing good money after bad.
If your business requires inventory or capital assets, are you tracking those carefully to ensure that what you’re spending to replenish or add additional assets isn’t more than it needs to be? And are you maintaining an appropriate level of inventory? Too much means you risk the possibility of having overspent on what could turn out to be obsolete inventory; too little risks losing sales because you don’t have enough inventory to fill orders promptly.
Also, if you purchase an asset that doesn’t generate revenue or looks as though it won’t in the future, it’s costing you money. So, either don’t buy assets you don’t really need or unload them if they’re not providing any economic benefit.
LABOR COSTS
The cost of labor is generally your biggest overhead expense. Are you paying your people too much? Or not enough to keep them? Compensation surveys are a good place to start to see if you are in the pay range you should be for your industry.
- Bureau of Labor Statistics has some information that could be helpful
- Companies such as Salary.com have packages you can purchase with a more detailed analysis than you’ll find on the BLS site
Another way to look at your labor costs is by finding out if your labor force is being used properly. Do your people have the right skills to complete their assigned tasks? Does everyone have enough work to do? If not, you might consider trimming your workforce. But if your employees are routinely overloaded, you might want to consider adding staff. Even though that will add costs, it can be a more economically smart move in the long run.
As your small business grows, make sure to adjust the responsibilities of your existing staff. Failing to do this can easily lead to team members becoming disengaged and lowering the overall effectiveness of your staff — and that will increase your costs.
COST OF BENEFITS
Are you offering more ancillary benefits to your employees than you can afford? The smaller your company is, the more difficult and costly it can be to provide rich benefits. Retirement plan matching, HSA or HRA contributions, generous paid time off — it all needs to be examined thoroughly because benefits spend can quickly add up, especially for a small business. Working with a benefits advisor, health care expert, and financial planner with retirement plan experience can help you make the best possible decisions.
Keep track of both your net and gross profit margin. Examine them regularly to see if there are trends. The difference between net and gross profit margins will indicate if your overhead costs are out of line.
Cash Flow Problem #4: Using an outdated pricing model or strategy
What you charge for your product or service versus the direct and indirect costs to produce that product or services dictates your net profit and, in turn, your cash flow.
- Examine what your competitors charge and review industry pricing standards to make sure you’re in the appropriate price range.
- Watch the inflationary rate, interest rate, and fiscal policies or regulations imposed by various government entities and weigh how those affect costs against your pricing structure.
- The inflationary rate is most often seen as the consumer price index (CPI). Broadly speaking, if the CPI in your sector indicates a 4% increase in the trailing 12-month period, you can expect that your costs would rise a commensurate amount and you will be losing profit margin — and cash flow — unless you increase your pricing model accordingly.
- The US Bureau of Labor Statistics (BLS) publishes CPI data monthly at bls.gov/cpi/. It also offers the Economy at a Glance, which can provide top level data in an easy-to-digest format.
- Fiscal policies and regulation changes can impact on your pricing too. For example, minimum wage hikes, tax rate changes, or additional occupational licensing requirements could affect your customers’ ability or willingness to pay your prices or maintain current purchase levels.
Don’t forget to adjust pricing for your existing customers. The further you fall behind on raising prices to current customers, the longer it will take to get them up to where you want your pricing to be. And the more irritated customers may become with constant price hikes when they are accustomed to no changes.
Ensure that your contractual agreements with all your customers provide you with the flexibility to adjust pricing.
Cash Flow Problem #5: You have a high rate of customer churn
A high churn rate presents multiple problems for any business:
- As customers leave, your overall revenues will be reduced until you replace those customers with new ones.
- It costs more to replace an existing customer than it does to keep the ones you have. A marketing metric called Customer Acquisition Cost (CAC) summarizes these costs and can illustrate just how much money you’re spending to get new customers.
- The time and energy it requires to land new customers can also often lead to a worse experience for your existing customers, which can drive some of them away.
It is critical to ask, “Why are my customers are leaving?” Some customers may be open to sharing why, especially if prompted during the exit process. Other times, you’ll need to internalize the question and self-examine the business. Do your offerings not provide the same value they once did or is your offering becoming stale in the marketplace? Open a dialogue with some of your best customers to get their thoughts on the relationship and what your business is providing them. Look at all your workforce that interacts with customers. Is there a theme where certain client-facing staff have higher rates of customers leaving? This could be indicative of a people problem. Does your offer have unresolved issues (ie: glitches in proprietary software) that are causing poor user experience for your customers? Ideally, testing would take care of issues prior to a product launch, but if issues come up later are you actively communicating with your customers, so they feel at ease? These are just some of the questions you can ask to try to identify the root cause of customer churn.
