In the second post in our new series on cash flow management, we’re discussing the importance of a strong cash flow strategy, and the symptoms that could indicate you have a cash flow problem.
If you haven’t read part one: cash flow basics, head over and give it a read now.
In today’s post, we’ll also take a look at business models, and whether a subscription-based model could help you to maintain a steady income stream.
Part two: Failure to plan is planning to fail
You know it’s best to be prepared and have a plan when it comes to achieving your personal and professional goals. Improving your cash flow is no different.
Devise a cash flow strategy
The first step to creating a cash flow strategy is to decide on your goals, because how can you recognise what you’re doing well and where you could improve if you don’t know what you want to achieve?
Once you’ve jotted down a few financial and non-financial goals, you need to assess your current position and diagnose any areas of your business where cash flow issues could cause you trouble.
The four essential financial statements every business needs are a balance sheet, income statement, statement of stockholder’s equity, and a cash flow statement. In addition to being a useful resource for your internal accounting purposes, these are also necessary to give potential investors and buyers a broad understanding of your company’s finances.
Not only that, but your cash flow statement will give you an indication of problem areas and allow you to create a strategy to tackle them.
What symptoms indicate cash flow problems?
There are a few issues that can point to a problem with your cash flow. These include, but are not limited to:
- High accounts receivables
- Too much inventory
- Growing too fast
- Sales declining
- Not enough profit
If you offer credit to your customers and they take too long to pay, or you keep large amounts of stock on hand for when bulk orders come in, you could have difficulties freeing up cash when you need it. Equally, if your profit margins are down or you’ve invested in growing the business recently but haven’t seen the benefits yet, or you’re regularly spending more money than you’re bringing in, it could be a sign that you need to revisit your cash flow strategy.
The subscription-based business model
One of the simplest ways to solve a cash flow problem is to generate a steady stream of income—a fixed amount allowing you to budget for your outgoings each month.
The subscription model has become incredibly popular with businesses of all types in recent years. Instead of sending a one-off bill for your product or service and hoping that your exceptional customer service and attention to detail will turn them into a repeat customer, you offer an ongoing relationship for a monthly fee, often including a small discount as an incentive.
Not only does this make the cost more manageable to the consumer, especially for your premium offerings, but it allows you to manage your budget and vastly increases the likelihood they will remain a customer for an extended period of time.
There are positives and negatives to the subscription-based business model, so it’s important to weigh all of your options before making any big decisions.
Pros
- Steady income
- Good relationships
- Singular focus
Cons
- Increased cancellation rate
- Commitment phobia
- Loss of value
- Singular product vs. varied products
- Issues (delays, defects, etc.) affect every subscriber
In our next article on cash flow management, Those Who Shout Loudest Get Paid First, we’ll be taking a closer look at the credit control process and how to minimise your risk of late payment. Ready for more? Click here to get our guide, Happiness is a Positive Cash Flow.
Get in touch if you’d like to discuss your business finances and find out how we could help.
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