PART 1: Solving The Cashflow Puzzle, How Much Is Enough?
Over the years I have been asked to talk or write about cashflow. I have found it incredibly hard to do so and do my best to avoid it. Until recently I found the concept of cashflow rather abstract (a bit of a worry seeing as I'm an accountant). It sounds simple enough. Money in versus money out, but what does that really mean? Why is it:
90% of small business failures are cashflow related?
More than 60% of small businesses cease to operate within 3 years?
Almost 50% of businesses are under cashflow pressure in the first 12 months?
The pieces of the puzzle were laid on the table in a conversation with my business bestie and friend. We were discussing all of the content I had produced and discovered a lot of the content could be nicely put under the heading of cashflow. It dawned on me, in that moment, the reason I found cashflow so hard to conceptualise was because almost everything we do in business is in some way connected to cashflow. When I heard the word 'cashflow' I focused on the destination, not the journey. The destination being a state where income exceeds expenses while living your ideal life. But how do you get there? Owning a business is just the vehicle.
Being a lover of numbers and money, the management of money is second nature to me. I couldn’t see the woods for the trees, I had taken cashflow for granted. I had been looking at jumping to the end result, of achieving positive cashflow, not the individual steps that get you there. The subject of cashflow is enormous!
The scary statistics about business failures essentially don’t really tell us anything about why businesses fail or provide any insight as to how to avoid it happening to you. What specifically is causing this shortfall of cash in versus cash out and what can you do to ensure cash in exceeds cash out? There are so many questions, and more to come!
How much is enough?
I love this question. I particularly love asking this question of anyone who has ever felt shame or embarrassment around their financial situation and their relief after talking it through.
We are fortunate to live in a world where everyone is different. We each have our unique values, thoughts, beliefs and world-view. These are ours and no one else's. We are living in a state of flow when we can live our lives according to our values, thoughts, beliefs and world-view, yet it is so easy to get caught in the trap of living other people's lives. Living the life others expect of us (family, friends and society), not the life we want for ourselves.
The answer to this question lies in understanding:
Your personal values, or alternatively put what’s important to you, what lights you up, what makes you angry?
Where are you now, financially?
Where do you need to be, financially, that is going to result in a life that is values aligned?
For example, I recently did this exercise with a client. We came up with an amount that they would like to earn each year, to meet her lifestyle goals and why. There was a gap between current earnings and desired earnings. We discussed what would need to change in their business to get to desired earnings. It became clear that there was going to need to be a series of between trades current lifestyle and future goals. The only way to navigate through this process is to understand what is important to you. What are you prepared to give up and what you will never sacrifice? Having a goal that is not values aligned is difficult to achieve, as there is an inherent lack of motivation and drive. David Maister’s book, Strategy and the Fat Smoker, discusses this in detail. You can check out our book review here.
Ultimately money is an exchange of energy. How much energy are you willing to invest to achieve your financial and lifestyle goals?
If you want to find out what specific actions that result in cashflow shortfalls with businesses and what actions you can take to avoid becoming part of this atrocious statistic, take a look at Part 2: Solving the Cashflow Puzzle, what causes cash shortfalls & what to do about it.
If you would like specific advice tailored to your business and circumstances, Accounting Heart offers affordable service packages where you can work with Sonia one-on-one to help you get your business where you want it to be. Book your FREE Discovery Call to find out more.
Disclaimer: This is general information only and is not advice of any sort. No warranty or representation is provided by Accounting Heart Pty Ltd as to the accuracy, currency or completeness of the information contained in this blog. Readers of this blog should not act or refrain from acting in reliance upon any information contained herein and must always obtain appropriate taxation and / or other advice as may be appropriate having regard to their particular circumstances.