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Building a stable foundation for your business


Your business’s foundation is its cash flow, the issue is that most small business owners don’t know if their cash flow is positive or negative. So let’s first go over what your cash flow is and how to know if you’re in the black.

Your cash flow

Every dollar the enters your business is part of your cash flow, but so is every dollar going out. Let’s say that you rent a space and it costs you $10,000 a month. You’re already cash flow negative -$10,000, that means that your first few sales are not even profitable you’re just covering your expenses.

In addition to rent, inventory, and your employees you are also an expense, if you’re not you should be. Many business owners forget to set themselves a salary and only count on the business’s profit as their income.  You have to eat too, you have expenses so make sure you take a salary.

Getting some stability

Once you know how much goes out of your business it’s time to know how much should come in, and add 30% to it. That means if your business has expenses of $100,000 a month you’re talking $130,000 as your baseline. The reason is you need to keep it together when the hard times hit, having some cash set aside will help you do that.

As for the incoming cash, if you monitor your client’s purchases you know what you’re client’s lifetime value is. Basically it the amount of money the average clients spends on your brand. Here you deduct 30%, so if your customer value is $1,000 you calculating $700.

How this all comes together

taking your total expenses and dividing them by your customer value will give you your break-even target. So you know how many new clients you have to get this month. The clients you retain are there to grow your business. You should cover your expenses with new clients to make sure your business is healthy.

So take that $130,000 and divide it by $700 that means you need 186 new clients a month. For an average 24 day work month, it’s just under 8 new clients a day.

If you maintain your business in this manner the growth will happen by itself. Remember your existing client base is taking care of growth. You just have to make sure the ground you’re standing on doesn’t turn into quicksand. As long as you keep this system up you should see constant growth, and you’ll sleep like a baby (and I don’t mean wake up every hour and cry).

 

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