Will Revenue Generation Solve Your Cash Crunch?
You hear it often where business owners are concerned about their depleting cash levels, and the advice doled out is to create more revenue. Bring in the cash and everything will be ok. But will revenue generation really solve your cash issue? No. No it won’t.
Revenue is great to have, and an absolute necessity for business, but if you aren’t taking care of what is going on inside your business and managing the money in your business well, then revenue generation won’t help your situation much.
Regardless of the amount of revenue or sales that your business is bringing in, if you don’t have profit to back up your revenue numbers, then that’s a red flag for your business. Profit needs to be generated for a business, and if you are operating your business at a loss, your business will eventually go bankrupt due to financial mismanagement.
Having large sales numbers is great, and profit won’t exist without sales, but before you jump the gun and start generating more sales to solve your cash flow issues, have a look inside the business and see how you can create financial management control and efficiencies. It is possible to increase your profit without having to increase sales.
When to focus on revenue generation and increase sales
Until you have a solid understanding of how your business works and creates profitability, any effort on sales will be lacklustre. You want to grow your sales when you have a solid financial foundation in place so that as you increase your sales levels and generate revenue that your profit margins are as high as they can be to increase the profitability of your business.
Here are steps you can take now to improve profitability in your business:
1. Ensure you have a strong bookkeeping system
Without bookkeeping in place, you will never know if your business is profitable or not. It is essential not only for tax purposes but for business to keep a strong bookkeeping system in place. Ensure you have hired a qualified bookkeeper to do the job, because accounting and bookkeeping mistakes can be costly.
2. Read and understand your financial reports
The most common financial report you will use in your business is the Income Statement, also known as the Profit and Loss Statement. The purpose of this financial report is to tell you how profitable your business is.
The next common financial report you will use in your business is the Balance Sheet. The balance sheet tells you the financial health of your business and the amount of equity you hold in your business.
The purpose of financial reports is to read them and understand what they are telling you. They offer valuable feedback on the performance of your business and show you what works well and what needs improvement.
3. Create a business financial plan
Financial planning in business will help you optimize the profit in your business. A business financial plan is where you measure where you are currently at in your business, and you plan 12 months out to where you want to grow your business. It follows S.M.A.R.T. goals and creates an achievable and realistic growth plan in your business. Not only are you future casting your profits, but you are planning your expenses and ensuring that your net profit margin remains tight or grows as you grow your business.
4. Monitor your results
Having a financial plan is great but you also need to monitor your results against what you had planned, and you need to do this each and every month. The efforts of creating a financial plan for your business will be fruitless if you aren’t monitoring your results.
It’s in the variance analysis that you can see where your efforts are paying off and where they fall short. By monitoring your results, it allows you to course correct to keep you moving towards your financial goals.
5. Implement a cash management system
Through creating and implementing a cash management system you are allowing yourself to be proactive in your cash planning strategy. Cash flow is vital in your business – you need cash flowing in your business to meet your financial obligations. If you fall short and cash and can’t pay your bills, your business will suffer and ultimately close its doors.
Your cash management system will not only have you project 6-8 weeks out, but it will have you build your cash reserves and have you set up lines of credit or loans for emergency situations.
6. Get comfortable with your money
A key component of being a successful business owner is to have a positive relationship with money. Losing any money mindset blocks that you may be holding you back and bringing in sales and profitability is vital for a business owner.
Get comfortable with looking at bank statements, bank balances, income statements and balance sheets. As your business financial literacy increases, so will your confidence and you will shake any imposter syndrome that you may be feeling.
Now it’s time to focus on revenue generation
Once you get your financial house in order it is a great time to generate more sales. Revenue generation is valuable when you have the systems in place to ensure profit optimization in your business.
The bottom line is managing a business requires you to look at and know your business numbers. Even if you have bookkeepers and accountants helping you out, you as a business owner need to understand what is going on in your business financials. You need to understand how your daily decisions affect your profitability.
If you feel you need the guidance and support of a business finance coach who can guide and support you in setting up a reliable financial management system for your business, book a free consult call with me here to see how we might work together.
