This week will be a little different, as it is difficult to present blanket information that will relate to every company.  We will do our best to cover the business growth basics.  The goal here is to take time to review your financial future and processes, and then next week we will look at how you will fund that growth.

We will cover...

It's worth considering how a nominal increase in pricing can cause a material improvement in profits.

A lot of business owners say, "My price is set by the market." You're right. If your business is a commodity, that is 100% correct. You cannot increase your prices willy-nilly. However, if you are in the knowledge business and if you are a business that makes money on knowledge workers, skilled blue-collar or white-collar businesses - In order to increase your prices, what you have to do is demonstrate all your value.

Why Would You Want to Increase Prices?

Before raising your rates, you need to know why you might need to bump them up in the first place. Charging more money for your products and services is a result of various factors, including the following.

Business growth: Depending on the size of your business, adding some employees or expanding your departments can demand a price increase. You'll need the income to pay your new team members, and a price increase can help you achieve that.
Increase in business costs: Raw material costs can change at a moment's notice. For instance, an increase in the price of lumber can cause a construction company to ask more for building a new home. Or, a shipping business may charge more for deliveries as gasoline costs go up. As business costs increase, so too do the costs of the final product or service.
Quality control: In most instances, your product's or service's quality takes a higher priority than setting a lower cost than your competition. Maintaining your business' reputation is a typical and worthy justification for raising your prices.
New services: You may need to increase your prices if you're planning to offer a new product or service. If your customers have been asking for something that will cost you more money to produce, they may be willing to pay a higher price to receive it.
Market value: Ensure you're setting your prices based on how your customers value you. If your costs are lower than your competition's, there's an excellent chance it's time to charge more to keep your business competitive and profitable.

How Can You Increase Your Prices Effectively?

Historically, price changes were so common that customers expected it when a new year rolled in. Today is a bit different – price changes are rare and unpopular. With the market currently in hyperinflation, it is more timely than ever for companies to investigate price increases to keep up with higher input costs. The question becomes, how can you convince resistant customers to accept an increase? One wrong move can produce costly consequences, as many companies have figured out.

1) Setting a Fact-Based Foundation

Before any price increase occurs, you first must conduct a detailed landscape analysis to build your foundation to answer why your price is increasing. Three key components to focus on are the general market sentiment, your customer sentiment, and the value your offering provides to get an external and internal perspective on your price increase’s suitability.

Consumer Price Index
One way to understand the general market sentiment is to track the historical prices of your products along with competitors’ and compare it with a broad market measure like the Consumer Price Index. If you see that your prices have not kept up with the CPI even with a 5% increase, this gives you an indication that your price increase is fair (and customers would agree).

Transaction Analysis
The best way to understand your customer is to utilize your transaction data to analyze customer purchase behavior. For example, you can leverage the data to create customer and product segments, based on behavioral attributes like average spend, frequency of purchase, etc. You can then model willingness to pay (elasticity) for each segment helping you identify areas where pricing leverage exists. Moreover, your transaction data gives you insight into how your customer segments have changed over time, so you know which segments to prioritize and invest in while also positioning your pricing to account for future changes. Setting your pricing based on the needs of the customer will ensure successful execution in the market.

Value Add
In addition to understanding your customers, you want the customer to understand you too. More specifically, you want the customer to understand the value your product or service adds to their life. There are two ways to assess value – perceived and financial. Perceived value is how customers feel about your offer while financial value is the business case justifying the use of your offers versus the next best alternative. To accept your price increase, your customers must clearly understand both the perceived and financial value gained from your product or service. For example, if your customers value quality, reliability, and responsiveness, these attributes must be highlighted in your offering to help users see what incremental value you offer. Otherwise, your customers may feel your price increase is unwarranted since they are not considering your value adds

2) Effectively Communicate Your Message

No one likes a sudden price increase, especially customers. To successfully implement a price increase, you should let them know in advance what is to come. Your sales force should be communicating with customers about any price changes ahead of time. Further, they should be available to answer any questions the customers may have during the price increase period. If you anticipate some or all of your clients may not yet be receptive to the price increase, consider increasing notice periods giving them extra time to internalize the increase.

3) Predict Competitive Reaction & Industry Research

Companies must also consider how competitors may react to your price increase and plan a suitable response. If competitors follow your lead, what would that mean for you financially? What if they do not follow your lead? You can always run different simulations to understand competitor reactions and devise playbooks accordingly. For example, you can take a pilot price increase on a subset of products to test the waters before layering on the increase across your portfolio.

When implementing price increases, you need to keep your pulse on the industry. Optimizing your prices based on what your competitors charge is an excellent way to do this. Research current market rates, so you can maximize your profits. Here are some things to remember when comparing your prices to others in the industry.

Set yourself apart so your pricing makes sense: Whether your new price is lower or higher than your competition, it should be realistic. Some companies can charge less than their competition because they produce the materials they use for their products. Others charge more because they use premium, organic or valuable resources. Let your customers know the unique information that sets your company apart from the rest and justifies your price.

How Can You Let Your Customers Know About Price Increases?

One of the most significant challenges in implementing a new pricing strategy and charging more is keeping your customers happy throughout the process. Here are some ways you can let your clientele know that you're raising your prices.

Contact them directly: Your customers will feel appreciated if you inform them of the price increase before it happens, especially longtime clients who have been supporting your business for years. Reach out to your customers — by name, if you can — and keep them in the loop about what you're doing and why.

Give plenty of advance notice: Letting your customers know about the increase is essential, but giving them time to process the information is equally critical. Allow clients time to adjust their budgets by telling them about your intentions several months in advance.

Frame the increase in a positive light: Be confident when telling your customers about the price increase and frame it in a positive light. Push the point that the elevated price will add more value to your product or service and maintain your consistent standards of excellence.

Let customers reach out with questions and concerns: Keeping an open line of communication after the price increase is part of making patrons feel valued and educating them on why you increased your prices.

What is Financial Forecasting?

Financial forecasting is the process of estimating or predicting how a business will perform in the future. The most common type of financial forecast is an income statement, however, in a complete financial model, all three financial statements are forecasted.

Your sales forecast is the foundation of the financial story that you are creating for your business. Once you have your sales forecast complete, you’ll be able to easily create your profit and loss statement, cash flow statement, and balance sheet.

Sales forecasts help you set goals
But beyond just setting the stage for a complete financial forecast, your sales forecast is really all about setting goals for your company. You’re looking to answer questions like:

• • What do you hope to achieve in the next month? Year? 5-years?
  • How many customers do you hope to have next month and next year?
  • How much will each customer hopefully spend with your company?

Your sales forecast will help you answer all of these questions and potentially any others that involve the future of your business.

Sales forecasts inform investors

Having a solid sales forecast also provides a picture of your performance and performance milestones for potential investors. Like you, they want to be sure you have established goals and a firm trajectory for your business laid out. The more detailed, organized, and up-to-date your forecast is, the better you explain the position of your business to third parties and even employees.

How to use your sales forecast for budgeting

Your sales forecast is also your guide to how much you should be spending. Assuming you want to run a profitable business, you’ll use your sales forecast to guide what you should be spending on marketing to acquire new customers and how much you should be spending on operations and administration.

Now, you don’t always need to be profitable, especially if you are trying to expand aggressively. But, you’ll eventually need your expenses to be less than your sales in order to turn a profit.

How detailed should your forecast be?

When you’re forecasting your sales, the first thing you should do is figure out what you should create a forecast for. You don’t want to be too generic and just forecast sales for your entire company. On the other hand, you don’t want to create a forecast for every individual product or service that you sell.

For example, if you’re starting a restaurant, you don’t want to create forecasts for each item on the menu. Instead, you should focus on broader categories like lunch, dinner, and drinks. If you’re starting a clothing shop, forecast the key categories of clothing that you sell, like outerwear, casual wear, and so on.

You’ll probably want between three to ten categories covering the types of sales that you do. More than ten is going to be a lot of work to forecast and fewer than three probably means that you haven’t divided things up quite enough.

You really can’t get this wrong. After all, it’s just forecasting and you can always come back and adjust your categories later. Just pick a few to get started and move on.

Sales forecast assumptions

One thing to remember is that your sales forecast is built on assumptions. You’re not predicting the future, but aggregating information to help define your future outlook. These assumptions are always changing, meaning that you’ll need to have a pulse on the following:

Market conditions

Having a general understanding of the macro effects on your business can help you better predict overall growth. A growing or shrinking market can either provide a low or high ceiling for potential sales increases. So, you need to understand how your business can react to any changes.

What does the broader market look like? Is the economy slowing or growing? Is the industry you operate in seeing an influx of competition? Maybe there’s a labor or material shortage? Are there new customers you now have access to?

Seasonality

Depending on what you’re selling, you may find dips or increases in sales at specific times during the year. This seasonality may have to do with the weather, holidays, product/feature releases, or a number of other predictable factors.

If you have been operating for a while, you can likely look at your accounting data to identify any trends. If you’re a new business look to your competitors to see how they act during specific times of the year to help you identify these trends earlier on.

Marketing efforts

How much you spend on marketing, and even your messaging may have an impact on your overall sales. Make sure that you connect any performance changes to marketing efforts that may affect your performance.

Are you launching a new marketing campaign? Are you spending more or less on advertising? Are you adjusting your targeting for digital ads? Are you branching out or removing specific marketing channels from your overall strategy?

How far forward should you forecast?

We recommend that you forecast monthly for 12 months into the future and then just develop an annual sales forecast for another three to five years.

The further your forecast into the future, the less you’re going to know and the less benefit it’s going to have for you. After all, the world is going to change, your business is going to change, and you’ll be updating your forecast to reflect those changes.

12 months from now is far enough into the future to guess. You’ll have to update your forecasts regularly with actual performance to help keep them accurate.

And don’t forget, all forecasts are wrong—and that’s O.K. Your forecast is just your best guess at what’s going to happen. As you learn more about your business and your customers, you can change and adjust your forecast. It’s not set in stone.

Forecast Scenarios

Predicting your company’s future can be particularly challenging, especially if your company is a startup or is growing significantly. Creating multiple forecast scenarios can help you understand how your company could be impacted by different potential outcomes.

The following four forecast scenarios, which we’ll discuss in detail below, could be helpful for your private company.

Each forecast scenario varies in terms of risk—such as the ability to hit projected revenue and profitability—and each is suited for a particular end user, such as a bank, investor, the board of directors (BOD), or internal business unit.

Scenario 1: Roll Out of Bed

The roll-out-of-bed (ROB) financial forecast scenario has the least risk in terms of your company’s potential to achieve the predicted revenue and profitability. This is the forecast your employees could literally roll out of bed and achieve. In other words, your company should be very comfortable with its ability to hit the projected revenue and expense numbers.

The ROB forecast is especially useful because it shows, from a revenue and cash standpoint, a company’s standing if it were to exert minimal effort or take minimal risks.

Scenario 2: Bank

The bank financial forecast scenario is the forecast your company can give to a bank or investor. Banks will often require your company to provide an annual financial forecast that has been approved by the BOD. This forecast is one risk level higher than the ROB forecast because it has more aggressive revenue growth—and possibly profitability—expectations.

Before submitting a forecast to the bank, your company should be confident in its ability to not only hit the forecast, but also beat it. Providing the bank with a rock-solid forecast scenario helps instill confidence in your business, and including growth as part of your plan keeps the bank interested and impressed.

Scenario 3: Stretch

The stretch forecast scenario represents your company’s ideal financial year. Of the forecast scenarios, this approach has the most risk because it has the most aggressive revenue growth and profitability expectations of all previously discussed scenarios.

This is the forecast on which your employees should set their sights, and with which their performance-based compensation should be aligned. If your company is able to meet or exceed the stretch forecast by the end of the period, it should also be able to achieve all of the previously discussed forecast scenarios, resulting in satisfied bankers, investors, and employees.

Scenario 4: E-Brake

The e-brake financial forecast scenario can be put into action if your company comes across a major financial or business problem and needs to extend its cash runway to fix it. Businesses extend their cash runways by slowing down hiring or even downsizing.

While no one likes to talk about this scenario, failures are common in a business environment—especially if your company is a startup—so it’s important to be prepared for potential setbacks and know ahead of time how they could impact your company.

A Key Performance Indicator is a measurable value that demonstrates how effectively a company is achieving key business objectives. Organizations use KPIs at multiple levels to evaluate their success at reaching targets. High-level KPIs may focus on the overall performance of the business, while low-level KPIs may focus on processes in departments such as sales, marketing, HR, support and others.

It is frequently said that “What gets measured gets done,” but how does the measuring itself get done? Below are the important steps to consider in effectively tracking KPIs as a part of your performance management framework.

Step 1: Choose one or two measures that directly contribute to each of your objectives.

While your organization has many moving parts that are integral to its operations and performance, it is not possible, or efficient, to track everything going on internally. For one thing, not all measures are important enough to track. For another, tracking too many measures creates unnecessary work that ultimately won’t be useful.

Instead, choose one or two metrics for each of your objectives that will be most helpful in achieving them. Multiple metrics could apply, but only a couple of them will be impactful enough to improve performance.

For instance, say your organization has an objective to improve your employee training and development programs. You could measure the percentage of trained employees or training time, but neither of these correlate well with the real result you’re looking for: developing peoples’ skills to handle more advanced roles. A better measure might be a reduction in errors as a result of the training, for instance.

Step 2: Make sure your measures meet the criteria for a good KPI.

In addition to making sure your chosen KPIs are true indicators of performance, they should also have some additional characteristics that will signal their effectiveness. Ask these questions about each KPI you’re considering:

• • Can it be easily quantified?
  • Are we able to influence/drive change using this KPI, or is it out of our control?
  • Does this KPI connect to our objective as well as overall strategy?
  • Is it simple to define and understand?
  • Can it be measured in both a timely and accurate manner?
  • Does it contribute to a broad range of perspectives – i.e. Customer,
  • Financial, Internal Processes, Learning and Growth?
  • Will it still be relevant in the future?

If you answer “no” to many of these questions, it may be a sign that the KPI either needs to be altered or replaced altogether.

Step 3: Assign responsibility for each KPI to specific individuals.

KPIs are an important tool in measuring progress, but they are more likely to be acted upon if someone is held responsible for tracking and reporting on them. An added benefit: The responsible party is also usually more inclined to want the measure to succeed, rather than accept underperformance. Even if all the person’s responsible for is reporting on their KPI, you can bet they’d rather report good news than bad news—which motivates them even more.

You may have a team member responsible for collecting the data. This is important, but maybe more important is having a business leader who is responsible for “reporting” on the measures. The business leader should be able to analyze the results, put the data in context, and explain whether performance is good or bad and why. The individual who is responsible for the measure will be able to influence the resources dedicated to improving the measure.

Step 4: Monitor and report on the KPIs.

Finally, it’s necessary to continually review your KPIs and their performance on a monthly, quarterly, or other predefined reporting frequency. Regular monitoring makes it easy to see the time frame in which something may have underperformed or overperformed, as well as what may have happened within this period to cause the change.

To ensure the whole team is on the same page—and because many measures and goals are interconnected—it’s crucial to report these findings to all relevant parties. Making use of customizable dashboards is a great (and simple) way to report to different audiences. You can make one dashboard for departments working on KPIs, and another that gives a high-level overview to executive teams.

Key Performance Indicator Examples

Financial Metrics

Profit: This goes without saying, but it is still important to note, as this is one of the most important performance indicators out there. Don’t forget to analyze both gross and net profit margin to better understand how successful your organization is at generating a high return.

Cost: Measure cost effectiveness and find the best ways to reduce and manage your costs.

LOB Revenue Vs. Target: This is a comparison between your actual revenue and your projected revenue. Charting and analyzing the discrepancies between these two numbers will help you identify how your department is performing.

Cost Of Goods Sold: By tallying all production costs for the product your company is selling, you can get a better idea of both what your product markup should look like and your actual profit margin. This information is key in determining how to outsell your competition.

Day Sales Outstanding (DSO): Take your accounts receivable and divide them by the number of total credit sales. Take that number and multiply it by the number of days in the time frame you are examining. Congratulations—you’ve just come up with your DSO number! The lower the number, the better your organization is doing at collecting accounts receivable. Run this formula every month, quarter, or year to see how you are improving.

Sales By Region: Through analyzing which regions are meeting sales objectives, you can provide better feedback for underperforming regions.

LOB Expenses Vs. Budget: Compare your actual overhead with your forecasted budget. Understanding where you deviated from your plan can help you create a more effective departmental budget in the future.

Customer Metrics

Customer Lifetime Value (CLV): Minimizing cost isn’t the only (or the best) way to optimize your customer acquisition. CLV helps you look at the value your organization is getting from a long-term customer relationship. Use this performance indicator to narrow down which channel helps you gain the best customers for the best price.

Customer Acquisition Cost (CAC): Divide your total acquisition costs by the number of new customers in the time frame you’re examining. Voila! You have found your CAC. This is considered one of the most important metrics in e-commerce because it can help you evaluate the cost effectiveness of your marketing campaigns.

Customer Satisfaction & Retention: On the surface, this is simple: Make the customer happy and they will continue to be your customer. Many firms argue, however, that this is more for shareholder value than it is for the customers themselves. You can use multiple performance indicators to measure CSR, including customer satisfaction scores and percentage of customers repeating a purchase.

Net Promoter Score (NPS): Finding out your NPS is one of the best ways to indicate long-term company growth. To determine your NPS score, send out quarterly surveys to your customers to see how likely it is that they’ll recommend your organization to someone they know. Establish a baseline with your first survey and put measures in place that will help those numbers grow quarter to quarter.

Number Of Customers: Similar to profit, this performance indicator is fairly straightforward. By determining the number of customers you’ve gained and lost, you can further understand whether or not you are meeting your customers’ needs.

Process Metrics

Customer Support Tickets: Analysis of the number of new tickets, the number of resolved tickets, and resolution time will help you create the best customer service department in your industry.

Percentage Of Product Defects: Take the number of defective units and divide it by the total number of units produced in the time frame you’re examining. This will give you the percentage of defective products. Clearly, the lower you can get this number, the better.

LOB Efficiency Measure: Efficiency can be measured differently in every industry. Let’s use the manufacturing industry as an example. You can measure your organization’s efficiency by analyzing how many units you have produced every hour, and what percentage of time your plant was up and running.

People Metrics

Employee Turnover Rate (ETR): To determine your ETR, take the number of employees who have departed the company and divide it by the average number of employees. If you have a high ETR, spend some time examining your workplace culture, employment packages, and work environment.

Percentage Of Response To Open Positions: When you have a high percentage of qualified applicants applying for your open job positions, you know you are doing a good job maximizing exposure to the right job seekers. This will lead to an increase in interviewees, as well.

Employee Satisfaction: Happy employees are going to work harder—it’s as simple as that. Measuring your employee satisfaction through surveys and other metrics is vital to your departmental and organizational health.

82 percent of business failures are caused by poor cash management, according to a US Bank study. 

Even if your company is currently profitable, it is still at risk for negative cash flow. One common example of this is if you have obligations for future payments that you cannot meet because you’ve mistimed incoming funds.

Cash flow is the net amount of cash moving in and out of your business at any given time. Positive cash flow means you are adding to your business’s cash reserves. Negative cash flow means you are depleting your cash reserves.

Negative cash flow isn’t always bad and doesn’t always mean your bank account will go into the red. Most businesses experience negative cash flow from time to time, especially if there is a seasonal component to the business. The trick is to make sure you always have adequate cash on hand to cover your expenses and obligations and to have more positive cash flow months than negative cash flow months.

You can track your business’s historic cash flow using the statement of cash flows report. This is one of the three key financial statements you should review in your business each month. In fact, we would argue it is the most important financial statement in your business.

Another method for determining your business’s cash flow is to use your profit and loss statement and balance sheet or your bank statements to run cash flow calculations. This will take a little more time than analyzing your cash flow statement, but calculating your cash flow manually on occasion can help you better understand trends in your business and the cause of those trends.

Even if your business already has good cash flow, it’s still a good idea to work to improve it. And if your business’s cash flow isn’t good, it’s critical for you to take steps to improve it right away. There are few things more stressful than having obligations you can’t pay due to a lack of cash. Fortunately, there are 12 steps you can take to improve your cash flow, and most of them are easy to implement.

12 Ways to Improve Cash Flow

Overall, cash flow is a combination of inflows and outflows. When you have more cash coming into your business than going out of it, you have positive cash flow. When the opposite is true, you have negative cash flow. Remember, negative cash flow doesn’t mean your bank account is overdrawn, but it does mean you are depleting your historic cash reserves.

Many business owners tend to focus exclusively on either cash inflows or outflows, but this slows down your efforts to improve cash flow in your business. You will improve your cash flow faster if you simultaneously combine improvements to your cash inflows and outflows.

Cash Inflows

Many business owners either ignore cash inflows completely or focus exclusively on total sales. Although you should continually look for ways to improve your total sales, you must be careful not to harm your gross profit margin in the process. The following six tips will help you maximize your cash inflows and your profit margin.

1. Increase Your Prices
When a customer buys a product or service, they consider a number of things in addition to price. If you provide your target customers with the results they value, then price doesn’t factor heavily in your customers’ purchasing decisions. Determine why your customers buy from you in the first place, and then amplify those reasons in your marketing and sales communications to decrease price sensitivity.

Increasing your prices lets you improve your total sales without additional investment on your part, making it one of the most effective ways to improve your cash inflows while also improving your profit margin.

2. Upsell to Your Existing Customers
It’s easier to sell to a customer who has purchased from you in the past than it is to acquire a new customer. It’s also less expensive to keep a customer than it is to get a new one. If you aren’t offering new or complementary products and services to your existing customers, you are missing out on a key opportunity to improve your cash flow.

Analyze your customers’ previous purchase history, then reach out to them to offer complementary products or services. If you don’t retain customer purchase history, you can instead train your staff on how to offer complimentary items at the point of sale to increase your average sales ticket.

Like with price increases, upselling to your existing customers typically requires little to no additional investment on your part.

3. Stay on Top of Your Accounts Receivable
If you extend credit to your customers, it’s crucial for you to stay on top of your accounts receivable. When you deliver a product or service to a customer and let them pay you later, you have to foot the bill—and pay out the cash—to cover the expenses associated with delivering that product or service with the cash you currently have on hand. This can have a significant negative impact on your cash flow if you have customers who are slow to pay.

Make it a practice to regularly review your accounts receivable aging report and follow up with customers whose invoices exceed the payment terms you’ve extended. Working to make sure your accounts receivable stay current is an easy way to ensure your cash inflows remain healthy.

4. Incentivize Your Customers to Pay Faster
This goes hand in hand with staying on top of your accounts receivable. If your customers have an incentive to pay faster, you are more likely to keep your accounts receivable and your cash flow in good shape.

Consider a cash payment or early payment discount (make sure you aren’t dipping into your profit margin if you do this) to speed up customer payments. If you don’t want to extend discounts, simply including a credit card payment link on your invoices can speed up collection significantly.[1] The improvement to your cash flow will usually offset the cost of accepting a credit card payment.

5. Open New Sales Channels
Having multiple sales channels increases the number of customers who are aware of and will purchase your product or service. If you sell exclusively in-person, consider developing an online presence. If you sell online, look at different venues for selling other than just on your website (being mindful of profit margins, of course).

You can also explore collaborative relationships with other businesses offering complementary products or services. For example, a massage therapist might offer to provide services in a chiropractic clinic once a week. Just keep in mind that opening new sales channels can require an investment, so make sure to do your research to make sure it is viable for your business before taking the leap.

6. Maximize Your Inventory
Many businesses carry too much inventory that doesn’t turn quickly enough. Even service businesses usually have at least one offering that isn’t very profitable. Ideally, you want to make sure you are focusing on the products or services in your business that sell the most, in the least amount of time, for the highest profit.

Analyze your products and services and identify the items that sell well and provide a good return on your investment. Amplify your marketing on these products, and reduce—or eliminate—the things that don’t sell well or that don’t yield a good profit margin.

A word of caution: Be careful about discounting products or services, even to maximize your inventory. Having a sale is often the go-to solution for increasing cash inflows, especially for product-based businesses. Although this does provide a temporary boost to your cash inflows, these discounts can devastate your profit margin. Running sales too often can also encourage discount shopping behavior in your customers—a habit that’s difficult to break.

Cash Outflows

Improving your cash outflows alongside your cash inflows is like rocket fuel for your business’s overall cash flow. The key is to not starve your business for resources in the name of saving money on expenses. The following are six ways to make sure your cash outflows support your healthy business:

7. Evaluate Your Expenses Often
At least once a quarter, do a line-by-line deep dive into your profit and loss statement. Look for unused subscriptions, excess office expenses, and any duplications in services you can eliminate to improve your cash flow without harming your business’s efficiency. You want to trim fat—not cut into the “muscle” that helps you or your team be productive and profitable.

If you have a hard time deciding where to start with your expense analysis, we recommend running a “profit and loss percentage of income” report and analyzing the expense with the largest percentage first. This report is available in most small business accounting packages. If your accounting software doesn’t provide the report, you can easily calculate the percentages yourself by dividing the expense amount by your total income, then multiply that number by 100 to get a percentage: (Expense Amount / Total Income) x 100 = Expense Percentage of Income.

8. Lease, Don’t Buy
Whether it’s a piece of office equipment or a new vehicle, consider leasing instead of buying. Leasing can help you always have the newest—and most efficient—equipment on hand without shelling out a lot of cash to acquire it.

Another benefit of leasing is the lessor will often cover repairs and maintenance as part of the lease agreement, saving you money and improving your cash flow in the long run.

9. Ask Vendors for Extended Payment Terms
Asking for terms beyond the typical Net 30 for large purchases will keep you from taking a big hit to your cash flow all at once. Extended payment terms also give you more time to sell the product before the payment is due to your vendor. Many vendors are happy to extend 30/60 or 30/60/90 payment terms to their loyal customers.

If your vendor doesn’t offer extended payment terms, ask if they will offer you an early payment discount instead. Your cash flow will still take a temporary hit, but your overall payment will be lower.

10. Buy in Bulk—Even If You’re Small
Vendors love large orders and often offer pricing discounts to customers who buy in bulk. Many small business owners think they can’t take advantage of bulk discounts, but with some creative thinking, even the smallest businesses can enjoy large-business discounts on materials and supplies.

Partner with another business—or several other businesses—and place a bulk order for the products you all use. Divide the discount among all the participating businesses—you could even let the business that accepts the shipment take a greater percentage of the discount—and everyone’s cash flow improves.

11. Get Efficient
The less time you spend producing a product or delivering a service, the more profitable your business is. This is especially true if you have employees you pay by the hour. Working to improve efficiency will not only improve your bottom line, but it will also improve your cash flow.

Consider upgrading any old equipment, invest in technologies that minimize duplicate efforts through automation, and explore performance incentives to help your business become more efficient—and more cash flow positive.

12. Use Other People’s Money (Carefully)
Not all debt is bad. Sometimes it makes sense to leverage debt in order to protect your cash flow, but you must be careful here. You should only borrow money if you know your business will make money as a result.

Consider your different business loan options and decide if taking on a certain type of debt can help your business grow in the long run.

Implement a system in your business where you regularly review and update your budget. You can do this as part of your routine expense evaluation, but don’t focus exclusively on cash outflows. Measure your business’s cash inflows against your outflows, and adjust both as your budget dictates.

Many small business owners struggle to understand their cash flow (the money moving into and out of their business), and sometimes aren’t sure if they’ve actually made any money until the end of the year. Even worse, sometimes they haven’t made any money—but by the time they realize that, it’s too late to fix.

What is the Profit First Method?

The Profit First method is a system in which business owners take a percentage from each sale as profit. The traditional profit formula deducts expenses from sales, leaving the remaining amount as profit.

One tool that can help is the book Profit First by Mike Michalowicz, which teaches business owners how to “transform any business from a cash-eating monster to a money-making machine.”

The Profit First formula flips the script on how business owners typically think about accounting and creating a business budget. Traditionally business owners deduct expenses from sales and consider the remaining amount profit.

Traditional Profit formula: Sales – Expenses = Profit

The Profit First formula puts profit first and encourages you to deduct profit from each sale and use the remaining amount for expenses.

The Profit First formula: Sales – Profit = Expenses

From the start, you’re accounting for your profit, taxes, and pay. What’s leftover is the budget your company has to spend on things like rent, salaries, material costs, and utilities.

It can be a bit uncomfortable to run your business this way. But putting profit first makes you more conscious of where and how you’re spending money.

More importantly, it makes you conscious of the need to invest in your own peace of mind and quality of life. That shift in mentality can be a game-changer for those not used to actually paying themselves.

How Does Profit First Work?

In Profit First, business owners take their profit out of the cash deposits before expenses rather than paying themselves with what’s leftover. The system involves transferring predetermined percentages of your cash deposits into various bank accounts to cover profits, taxes, operating costs, owner’s payments, and revenue.

How much you put into each account is determined by Target Allocation Percentages (TAPS). Your Current Allocation Percentages (CAPS) is how your Real Revenue is currently being spent.

What are Profit First Percentages?

Profit First percentages provide insight into your business’ current financials and a process for accomplishing future financial goals.

Current Allocation Percentages (CAPS) help you understand how your financials are currently being allocated between income, owners compensation, operating expenses (OpEx), profit, and taxes.

Target Allocation Percentages (TAPS) are where you’d like your financials to be split in order to increase profitability, cash flow, and business growth. These percentages are where you’d like to grow your business from your current allocation percentages.

This chart by Mike Michalowicz helps you understand what your target allocations should be based on your business’ real revenue range.