When I see a business which needs some money to do new things, the first thing I’ll consider is the organic cash flow model. This is where you expand the company using money which is already coming into the business, or increase the amount of money coming into the business in order to pay for the expansion.
For example, if you need to take on a new member of staff, I would work out how much that person is going to cost. Roughly, I’d advise that you have 3 months of salary + NI + the cost of their desk space, computer etc in the bank as a cushion before you take someone on. Some people prefer 6 months as a rule of thumb for a little more security, or if it’s going to take a bit longer for the new person to help you to earn more money. We’d then look at how your business could afford to do this.
But I don’t have enough turnover
Many of my business advice clients want to take on a new member of staff, or improve their website, but believe that they don’t have enough money coming in to finance it. They have been waiting until they have enough cash to be able to afford it, but a lot of businesses seem to get stuck at a certain level of turnover. And if you decide that you’ll wait until magically you can afford that new person, you’ll always be waiting. You need an artificial way to raise your ceiling, so that you can get enough money to get the new person, or afford the rebrand, or take time out from selling services to develop your new project.
How to raise your ceiling
There are two ways to get the extra money you need. Firstly, you can cut back on how much money you take out of the business. Do you really need that extra latte? Maybe you don’t need to buy those new shoes right now. Can you get a better deal on your mortgage? These are all good things to check anyway, just for the sake of your financial health. If this sounds like an area you could do with thinking through, speak to Simonne Gnessen, who is extremely skilled at helping you negotiate the personal financial minefields. Secondly, you can decide to increase your turnover in the short term. Can you put up your prices a little? I bet you haven’t increased your rates since you first heard the words “credit” and “crunch” put together in a sentence. Can you squeeze another couple of customers in? Can you be slightly more assertive in your marketing, or go to a few more networking events, so there’s a little more money coming in each month?
If you apply this to your own business, you can set a target for the extra money you need. Maybe you’re a techie type company and you want to move away from developing websites for clients and towards your own online products. Identify how much money you would need to step away (or partly step away) from client work for a few months, and work towards this. I highly recommend putting the extra money into a separate savings account, preferably on a standing order each month. Although you’ve still got exactly the same amount of money, splitting it between two accounts means that you’re more likely to save it up, whereas if you leave it in the regular business account, somehow it’s more likely to disappear.
This is a fairly long post, so I’ll sum up the main things to remember:
- Decide what’s going to make your business zoom in the future
- Work out how much money you’ll need to do this, both as a one off cost (e.g. new website) and as an ongoing cost (e.g. staff salaries, ongoing marketing costs)
- Set a target to save up
- Work out how to save up the extra – reduce spending and bring more in
- Put the money away so you don’t get used to it
Applying this to your business
If you are serious about having a grown up business, and recognise that you need to bring some money in to do this, watch out for the other posts I’m going to be writing soon about other ways of getting cash into your business to fuel growth. I’d advise subscribing so you don’t miss anything. And if you can’t wait, or if you’d like to talk through the implications for your business, do feel free to get in touch and see if I can help you to make all this into reality.