This is the second part of the Cash Flow (CF) series. Last time we dissected the first part of the Cash Flow equation – which is income, and I shared with you several actionable marketing tactics to boost your income and thus increase cash flow.
Today, we’re going to have a look at the second part of the equation, which if left unmastered, will cause major pain in your business, often leading to you being forced to shut doors.
While a large number of business owners have challenges generating additional flows of income to keep the business growing and thriving, likewise many struggle with expenses. They either spend too much money on location, taxes, fancy tools or hiring the wrong people just to name a few, or they don’t spend money at all thus making it difficult for the business to breathe – let alone grow.
Why are business owners struggling with understanding and mastering expenses? Do they have the wrong knowledge about expenses? What separates successful business owners from unsuccessful ones when it comes to masterfully navigating expenses that in conjunction with increased income leads to more cash flow?
Here are three types of expenses you absolutely need to understand and master if you want your business to thrive for several years to come:
1. Master the tax game.
“In this world nothing can be said to be certain, except death and taxes.” – attributed to Benjamin Franklin
Yes, you’ll have to pay taxes as a business owner.
And yes, you can benefit tremendously from taxes if you master the tax game.
Therefore, I advise you to pick a savvy accountant who’s been around for a while and knows the ins and outs of the balance sheet and profit & loss game.
You don’t need to be a big corporation to benefit from taxes and you certainly don’t need to open offices across borders and continents to be successful.
However, you do need to understand the different types of business structures (e.g. sole proprietorship, limited partnership, LLC, corporation, nonprofit corporation, trust) and pick the one that is going to serve your business and tax purposes best. You do need to understand the difference between assets and liabilities, and how their liquidity affects your balance sheet long-term.
Furthermore, you have to know whether, when and why to prioritize cash flow over profits.
2. Understand how inflation/deflation works.
Most people have a general idea of what inflation means: you get less goods and services for your money as “stuff” gets more expensive.
As a business owner, your knowledge about inflation/deflation should surpass the know-how of the mainstream public about this important financial vehicle.
You have to know and more importantly, understand the different types of inflation (e.g. price inflation vs. monetary inflation due to an increase in money supply) to benefit from the underlying mechanistic processes like enterprises, rich people and the Financial Power Elites do.
Needless to say, that this goes beyond you having business bank accounts in multiple currencies, establishing international trade relationships and selling to customers worldwide.
3. Learn the difference between good and bad debt.
Yes, you can bootstrap a business. And yes, I’m a huge advocate of this strategy. However, there comes a time in your business lifecycle where you’ll need a bigger cash infusion so to speak to take your company to the next level. This is where the notion of good and bad debt becomes crucial to your endeavors.
Ask yourself, is it better to lease a car, a building for your offices or even a plane? Or is it better to buy that car, the building and the plane? How can you use debt to finance long-term investments and reduce taxes aka harness the power of tax deductibles?
The word “debt” has a negative connotation. It’s true; if you don’t understand debt, you’re in trouble. On the other hand, if you know how to use debt, you can pursue a more aggressive growth strategy, especially if you have access to “cheap money” (low interest rates) and you can pay back in installments over a period of time.
Why do you think Apple borrows money when they have more cash than tech giants Microsoft, Google and Amazon combined? It’s precisely because they understand how to leverage good debt to gain more market power.
Here’s one more advantage of debt financing as compared to equity financing: you don’t relinquish any ownership or control of the business.
Control Your Spendings and Increase Cash Flow
For the accountants that are reading this article – you won’t like the following statement that I’m going to make. It goes like this:
You can’t save your way into growing your business.
But you do need to closely monitor your expenses and master both sides of the cash flow equation in order to grow a thriving business.
There are so many ways to increase cash flow.
In addition to the above mentioned strategies and the marketing tactics that I shared with you in the previous blog post, please consider the following:
- Send out invoices immediately to collect receivables more quickly.
- Increase prices.
- Improve your inventory.
- Re-negotiate deals with suppliers and ask for discounts in return to early payments.
- Lease more. Remember that lease payments are a business expense and can be written off.
- Build strategic alliances and partnerships to enter new markets.
- Franchise your products and services.
Ultimately, it all comes down to growth and expansion. If your business doesn’t grow, it dies. And one key factor to sustainable business growth is mastering the cash flow game.
What other strategies and tactics do you deploy to increase cash flow for your business?