Cash Flow Squeezes: A Church Tracking its Profit Margin

No matter the industry you are in, your business is bound to experience low cash flow. Your goal as the owner is to make sure it only lasts for a temporary period of time.?

However, when it happens, it should be a clear indicator to yourself that you were caught off guard. The truth is that low cash flow can be predicted. For example, if your administrative office assistant tracks the labor hours spent on a customer’s job site and compares it to the budgeted labor hours on the estimate, and they find you are exceeding the budgeted hours, that is a leading indicator that you will experience low cash flow at some point in the near future.?

It is a trickle down effect. This means there is a delayed effect of when you see the bank account balance hurting. Why is it a delayed effect? It happens because you have likely built up some cash in your bank account from profitable jobs in the past, from loans you’ve taken on, or from money you’ve contributed to the business. So, going over on budgeted hours on a single job causes you to lose a small amount of money, say $500 as an example, yet that small amount is difficult to notice when your bank account balance fluctuates up and down constantly. But the reality is that you lost money on that job, whether you can see it in your bank account or not. When this happens over and over again consistently, you find yourself in a position that is stressful with a bank balance that is forcing you to take on loans, which is a position we want to avoid.

The best method to avoiding cash flow problems is to measure the numbers in business on a regular basis.?

First, test the profitability of your business by accounting for a true owner’s salary. Most business owners try to scale before they have even produced enough margin to cover their own true salary. Insert in your monthly cost listing an amount that represents a monthly salary you would have to pay someone to do your job in the business. You will be surprised if your business can withstand it.?

Second, measure the profit of each job. Your goal is to produce a 55-70% profit margin on each job, each customer, etc. If we can do this for each job we do, then our P&L will also show this margin. How do we calculate this??

1. Tally up the total costs of your job.?
2. Subtract this number from how much your customer paid you. This result is known as your profit.
3. Take your profit and divide it by how much the customer paid you. This will be a percentage, and you want it in the 55-70% range.

Take this example:

1. Total costs: $1,000
2. Customer paid: $3,000. $3,000 minus $1,000 = $2,000 (profit)
3. Profit divided by Paid. $2,000 / $3,000 = 66%

News flash…you should be expecting to leave job sites with double of what it cost to do the job. Second news flash…this means you should be charging triple of what it costs to do the job.?

This is the amount of money required for a business, or any organization to operate. Even a bake sale put on by a church should be producing a 55%-70% profit margin. But they don’t track this, or aren’t worried about this because they survive off of volunteer labor. But what happens to volunteer labor? They get overworked. They get tired. It is difficult to get volunteer help in the first place.?

The same will happen in your business if you continue to produce low margins. You will become overworked because there is not enough money to hire help. You will get tired and feel defeated and frustrated.?

The third item, and final item for this blog’s sake, is your spending on overhead. If we begin producing the right margin, but we overspend on operating expenses, then we are back in the same rut. Your bottom-line goal is to make sure you never spend more money than what you have. A great way I like to do this is to see how much money did I bring in last month. Once I calculate that, then I set a goal to not spend more than that amount in the next month. It keeps me in check, and lets me work under a target. Tally up all your monthly expenses you expect to have in the next month, and you will see if you can operate your business within that limit.

Look, you are on your journey of learning this. You are on your journey of learning a new language in finance. You will not be fluent on day one. So take it slow, and set aside the 1st hour of your day to start putting the pieces in place for you to manage your business’s finances. If you need help, I am here to help. Begin with Step #1 in this article. You got this. Please know there is a better way, and that life as a business owner can be made easier and more rewarding.

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