Good times and downturns are the natural flow for businesses. Whether you’re going through a business crisis or just not growing in profit, it’s always a good practice to take a step out of the day-to-day activity and assess where your business truly is. I’m Renee Fink, CEO of ClearPath Workforce Management, Inc., and I would like to share with you how I’ve been able to guide our business through these roller-coaster times. Here are five areas you might want to consider.
- Cash situation
I once heard Alan Shugart, founder of Seagate, speak at a financial conference and his opening statement was “Cash is better than your mother.” While I personally don’t think that is literally true, that statement made an impact on my business life. I always think about having enough cash readily available for business needs.
When I was a financial consultant working with start-up and turn-around clients, the first action I would take was to create a quarterly working cash flow forecast. The spreadsheet was very basic, but powerful. It starts with the top line of beginning cash, then has sections of cash coming in and cash going out. The cash coming in could be from client payments, bank loan funding, and other receivables. The cash going out could be for rent, lease payments, payroll, repayment of bank loans/interest, vendor payments, and inventory purchases.
I worked with my clients to understand each of these areas and create supporting tabs on the worksheet to detail each line item of the summary. Once this data is rolled up onto the summary tab, you can easily see where there will be a cash shortage. During these weeks, you must delay payments and focus more on getting the cash in sooner. I would have two quarters of cash-flow forecasts projected at a time. I would fine-tune weekly by recording the actual in the current week and adjust where necessary. (If you would like a copy of this spreadsheet, please email firstname.lastname@example.org with the subject “Cash Flow Spreadsheet” and we’d be happy to provide one.)
If you find that your business has a cash-flow shortage, I would recommend being proactive with your vendors and call them. For one turn-around client, I made 250 vendor calls per week. I would inform them about their payment status, and keep meticulous notes on when I called, date and time, and with whom I spoke. I received more “thank you for calling me!” messages than negative responses from jerks who were angry. Out of 250 vendors, only one or two of them were nasty. Typically, vendors will work with you when you communicate what’s going on with your business. Of course, you need to follow through on your payment promises or call to inform them if there is a change.
I found that my clients didn’t always review their costs. Some payments were made on auto-pilot and not reviewed for years. In going through the cash-going-out process, we would look at the details of where the largest cash expenses were going and then we would ask, “Is this a necessary expense now?” If it was necessary, we would ask, “Is there a way to reduce this?”
There are three types of costs – fixed, variable, and direct. Fixed cost expenses are expenses that are based on a commitment such as a facility lease, annual liability insurance, and other obligations under contract. Variable cost expenses are expenses you have control over spending, such as supplies. Direct costs expenses relate to other costs such as the health insurance for an employee or their vacation accrual. The employee is not a fixed cost; however, if you engage an employee, your policy must be followed to offer benefits. If you terminate the employee, you also reduce the direct cost associated with them. Direct costs can also be associated with selling a product. If you don’t sell a product, you don’t have the cost of that product.
I recommend that you look at where your cash flows out, starting with the largest amounts first, and determine if they are necessary. You might be able to save a substantial amount if you change your services; for example, your phone service. It might be worth the effort to get competitive bids. Always check your existing agreements first, as some vendors have cancellation clauses in the fine print.
I have always felt that the right people are THE biggest asset a business can have. They are also usually the biggest expense the business has. When a business runs into cash flow shortages or lack of profit, one area to review is personnel. The questions I would ask my clients were, “Who is not performing? Are there any procedures we could streamline to reduce labor? Could we re-allocate tasks to make the employees more efficient?”
A secret I learned was to get the employees together and ask for their input. I asked them what was working and what wasn’t working. I found that if you made them part of the solution, they took ownership and pride in implementing the changes.
If you do have to cut costs with your people expense, consider reducing hours, reducing salaries, or other creative ways to reduce your expense before cutting people, especially people critical to your process. If you do have to reduce your staff, plan out what you are going to say to them in that difficult conversation. Doing so will leave your relationship with the employee on good terms and the door open should you want to rehire that person.
- Gross Profit Analysis
When I was a financial consultant, it always surprised me that the clients didn’t understand their gross profit. The gross profit is what you sell something for less all the costs that go into the product or service. For example, ClearPath is the employer of record for our clients’ sourced contingent workers. The client sets the pay rate for the worker and we add our mark-up. Our mark-up includes employer payroll taxes, workers’ compensation insurance, the cost to produce the paycheck, and other hard costs. If we don’t set the mark-up high enough, then we can’t cover our costs, let alone have a profit.
The same thing is true with, say, an online course. Sure, there are fixed costs for the online environment to deliver the course, but the expense might be in driving traffic through online ads to get people to buy the course. These costs could be directly associated with the income from that course. It always amazes me when I meet business owners who spend $10,000 in online ads to produce $5,000 in revenue as they think the ad spend is not related.
I recommend analyzing all your costs and relating them back to the revenue they drive. If they don’t produce your gross profit target, cut the product/service or increase your price, if the market will bear the new price.
Another great way to reduce your costs to improve your cash flow and profits is to move some of the non-critical aspects of your business to a third-party partner. Are there tasks your employees do in marketing, for example, that can be outsourced to a virtual assistant firm? Can a bookkeeping firm manage your accounting task? Could you reduce your office lease expense and partner with another business that has excess space?
These five areas are a good start at evaluating your business to see how you can make it through a cash-flow crisis and increase profits.
Many of our clients utilize ClearPath to outsource their contingent employees who work on a project basis. They just provide us the contact information and we take it from there. It’s a great solution for them to be able to focus on their core business without the burden of managing an employee and all the administrative burden that comes with the responsibility of being an employer. ClearPath can help you design a solution pertaining to your contingent workers. We can help relieve this burden by outsourcing your back-office Human Resources and Payroll functions to our Employer of Record service. Contact us to learn more about how our expert personalized service can let you get back to focusing on your business goals. Work with a leader in the industry for outsourced Human Resources and Payroll functions associated with W-2 and 1099 contingent workers. Let ClearPath be the path to your peace of mind. For other questions about assessing your workforce or conducting a review of your current hiring processes, the ClearPath team can assist you.
If there is anything ClearPath can help you with, please don’t hesitate to reach out to us at email@example.com. We wish you much success in your business.