BY AMITMITTAL, Business Coach, Consulting & Advisory
Understanding cash flow gap and strategies to overcome it:
It is easy to understand the concept of the cash gap. You can understand it by analyzing how your actions affect the cash flow in your business. There are many strategies to overcome these cash flow gaps. Some of them are:
- Finish your business projects so that it can be billed or invoiced by your clients.
- Ask for a bill or invoice immediately after the order is complete to maintain records.
- Have a proper system for your billing and invoice receipts.
- It is better to take a partial payment before the order is completed or full payment after completing the order.
Calculating profit break-even:
There is a simple formula to calculate the profit break-even of your company. The abbreviations of the formula are:
BE = Revenue required to break even.
FC = fixed cost/price
Profit = net profit goal
GP% = Gross Profit Margin
And the formula is BE = (FC+PROFIT) / GP%
To calculate the Gross profit and Gross profit margin %, you can use the following formulae:
- Gross Profit = Revenue – Variable Costs
- Gross profit margin % = gross profit / revenue
It is significant to understand the business ratios of your company and hence, reduce the cash-flow gap. You must have a reference point to compare your business results to the other companies or your competitors. These ratios are often interrelated and help you rectify the cash flow gap to a large extent. The ratio has better value when it is compared to the rest of the industry. You can analyze ratios in the following ways:
Return Sales = Profit / Sales
Current Ratio = Current assets/ current liabilities
Receiving outstanding = (Accounts received/annual sales) * 365
Quick Ratio = current assets/ current liabilities days
Return on capital employed = operating profit/ capital employed
Key Performance Indicators (KPI) of a Business:
You have to identify your key performance indicators to analyze the growth of your company. After you identify them, you can reduce the cash flow gap efficiently. Some KPI’s you can consider to measure your business growth is:
- Revenue – are your sales and leads increasing?
How much profit is my business making? You can measure it weekly, monthly and yearly basis.
- Cash flow – do I have enough money to run the business?
What is the value of my business? Am I losing or gaining value in the market?
You can also measure different business ratios like Days Sales Outstanding, Current Ratio, etc.
Impact of Product Price:
An increase and decrease in your company’s product prices can affect your cash flow to an extreme level. The product price is affected by a variety of factors like transporting, manufacturing, etc.
If there is an increase in your product’s prices, you must check how much profit margin your business has and whether you can give your customers special offers.
All these strategies will help you reduce the cash flow gap and understand the market’s different tactics.