Have you ever experienced a situation in which your sales volume and your business revenue went up rapidly over 6 months or a year? When it happens for many people, it seems like you and your business flourish and you are the luckiest business owner in your industry. Is that true? Well, maybe from the outside, it looks like you managed to increase the profitability of your business. But from the inside, the situation very often doesn’t look so good.
The revenue of your business has gone up. However, there’s not enough money in the company to cover all the costs that have risen too. You tried to solve the problem by selling more but you are still being forced to juggle the money to cover all invoices. In addition, quite often you cannot pay yourself a salary as you have to choose between paying yourself, investing in the company, or covering outstanding costs.
Also, with the higher sales volume, the workload has increased much more. Therefore, you had to employ new staff to serve the increased number of customers, so the business cost went up again. As a result, your cash flow problems are even bigger.
So although you have nice revenue, the profit level is low and there are even months in which the business generates loss that you have to cover from your savings. It seems that the more money the company makes the bigger the cash flow problem you have and you are not really sure why. Do you want to know why? Maybe you have no clue how to increase the profitability of your business? Let’s get to it!
What is the reason for that increase of revenue?
It is commonly believed that the reason you struggle with cash flow is that you lack knowledge or the ability to manage it. But from my experience, I can tell you something else. When you face a shortage of money in the business, then even the best cash management skills will not help.
If I were you, I would first check the level of your prices as they can be simply too low. The question is, did you calculate the prices of your products or services based on all your business costs (and not just production costs) and the possible sales volume that you could reach, or did you just set the prices with no thorough calculation? Instead of doing all the necessary calculations, you chose the prices based on a hunch, intuition, overall production costs, and prices of your competition. I assure you this is a better way to increase the profitability of the business.
Is there any other way?
What if nobody ever showed you how to properly calculate prices? Then, you probably used the second option. If so, then there is a strong probability that your prices are too low.
The situation may be even more difficult if the prices were set too low from the very beginning and the margin (the part of the price that should generate profit) was eaten by other business costs. If this is the case, then the increased sales volume and additional costs incurred through increased workload or additional investment will create a loss with each sale instead of profit.
So as you can see, this is the real reason for your cash flow problems. Cash flow management will not help you. You need to come back to basics and start with price recalculation. Are you 100% sure that you have a margin on all your products or services? Are you sure that it doesn’t have to cover any costs too? If so, you will start making a profit immediately without the increase of the current sales volume.
So, what should you do now?
The question now is, how do you calculate the prices and introduce the new prices so you don’t see the sales volume drop. If you want to find out, just read my next article. I explain there in detail what the price actually is, what elements it consists of and how to approach the calculation.