TCFBO #039: Budgeting Principle #5

Read Time: 4 minutes

We watched as a look of shock crossed the business owner’s face.

“That can’t be right. These jobs are profitable” he said.

OK. Now he was in the denial phase.

“Let’s go through the figures again then” we replied.

Only a few weeks earlier we’d been called in to help this particular business become more efficient.

But within a few hours it became clear to us that something was fundamentally wrong.

It took a few days to get the relevant data to make sure our initial thoughts were correct.

But when we did, the problem was there in black and white, staring us in the face.

The business was running out of cash.

And fast.

This was a small business that had profitable contracts supplying work to large corporations.

So what was the problem?

Unfortunately, many of these contracts required outlay upfront, in terms of labour and materials, and payment once the job was completed.

Often the payment terms were dictated by the large corporations.

If you wanted the work you had to agree to their terms.

And these terms meant this small business got paid 90 days after the work was completed.

Add to that the work often took at least 90 days to complete.

Then factor in that these big businesses were notorious for paying late.

And suddenly, you’re looking at paying out for a minimum of six months before seeing a penny coming back in.

So we went through the figures and the cashflow forecast again.

And again.

And again.

Eventually we turned to the business owner and said:

“The bottom line is, the faster you get work in, the faster you’re going to go out of business.”

We did propose some potential solutions in an attempt to prevent the business going into administration.

One of which was, if they could pivot to private work that paid a deposit, the cost of materials would be covered up front.

Then, because the jobs took less time to deliver, they would be completed within a week or two and the balance payment would then be paid on completion.

And, if the business had cash reserves or liquid assets, they could use them to help buy time whilst the business changed direction.

However, cash reserves and liquid assets were non-existent.

Outstanding debts meant the bank wasn’t prepared to help any further.

And any money that came in, immediately went back out again.

Sadly, this meant they were unable to pivot fast enough and the best option ended up being that the adminstrators were called in.

This is why this next budgeting principle is so important...

Budgeting Principle #5

“Increase the age of your money.”

Increasing the age of your money is about delaying the time between receiving money and spending it.

The older your money is, the better.

It means you’re spending money you received weeks, months, or even years ago, rather than relying on money to come in to cover expenses that are already overdue.

By aging your money, you are creating a financial buffer.

Not only will this buffer enable you to weather unexpected storms, it will also provide you with breathing space to plan for the long term.

As a result, you’ll be able to make more strategic decisions rather than reactive ones.

You’ll find you’re no longer chasing payments to cover your immediate costs.

Instead, you'll be able to plan for the future knowing that your present needs are already met.

So here are five suggestions to help you increase the age of your money.

1. Build Up Reserves

Start by gradually building up your reserve funds.

If you currently have no reserves, aim to cover at least one month's worth of operating expenses.

Then continue to build from there.

You don’t have to keep it all in cash.

Consider other assets your business could own that could be liquidated quickly should the need arise.

2. Delay Spending

Implement strategies to delay expenditures wherever possible.

Slow down the speed at which money leaves your business.

Can you negotiate longer payment terms with suppliers?

Or could you time purchases so they optimise your cashflow?

3. Prioritise Cashflow Management

Focus on strategies that improve your incoming cashflow.

Issue your invoices promptly.

Follow-up on late payments immediately.

Offer incentives for early payments or upfront payments.

Or consider penalties for late payments.

4. Monitor Cashflow

Regularly review your cashflow statements.

We cannot over emphasise the importance of this.

Understanding the inflow and outflow of your money is critical to increasing its age and ensuring your business stays afloat!

As the saying goes:

“Turnover is vanity, profit is sanity, cash is reality.”

So make sure you are keeping an eye on your current reality whilst continuing to move towards your vision. 

5. Be Patient

Don’t expect immediate results.

Increasing the age of your money is a gradual process that improves as you continue to refine your budgeting and cash management practices.

This is the final part of a short series discussing the mindset and practicalities of Budgeting Principles which we’ve found helpful for us and our clients.

In summary…

Budgeting Principle #1 – A part of all you earn is yours to keep

Budgeting Principle #2 – Give every dollar a job

Budgeting Principle #3 – Chunk down your large expenses

Budgeting Principle #4 – Review and adjust…with no big drama

Budgeting Principle #5 – Increase the age of your money

Implementing these principles is step towards financial stability and peace of mind.

They allow for a level of foresight and strategic planning that, as a small business owner, can be truly freeing.

Let us know how you get on and we’ll see you next week.

Paul & Philly

P.S. We’d love to know whether or not you’ve found this series helpful, or if there’s another topic you’d like us to cover in more depth. Just hit reply and drop us an email with your feedback.

Whenever you’re ready, there are three ways we can help you:

1. Grab a copy of Paul’s book “Backwards Planning - A Simple Method to Move You and Your Business Forward” and discover how to reverse engineer a life and business you truly love.

2. Book a facilitated “Life Vision Session” and start creating a life and business that are fully aligned with your heart’s desires. We’ll arrange a pre-session call with you to say “Hi”, explain how the Life Vision Session works and answer any questions you may have.

3. Apply to join “The Clear Focus Business Academy” and ensure your business is the most effective it can be at providing the money and lifestyle you desire. Simply drop us an email or contact us here to tell us you’re interested and we’ll send you more info.