It's a daunting fact that many small companies find themselves on thin ice due to a common pitfall.
Discover the issue that causes businesses to collapse and learn how your agency can avoid the same fate.
There's a staggering statistic about small businesses with less than 30 employees and annual revenue of under $10 million: 70% of such businesses will fail.
However, that's not the most disturbing part.
It's that they fail despite being profitable!
A profitable company can go out of business because they often look at their monthly income statement and surmise that they have all the information needed to move forward. This results in many small businesses finding themselves unable to manage their growth, which can lead to disaster.
Obviously, there's an issue here, but it's not as mysterious as it might seem. In this article, we'll explain the issue at hand and how you can overcome it in your agency.
The Issue (And What You Must Commit To)
The major issue that makes or breaks companies and often spells doom for smaller businesses is cash flow.
Although financial reports like income statements and profit are vital for every company, the cash flow statement is absolutely crucial. It's a tool that will help you manage ongoing and future projects so that your agency never finds itself in dire straits.
Let's look at an example of how cash flow works:
Imagine you've signed a contract with a Fortune 100 company that usually pays in 60 or 90 days.
You start servicing the contract, which requires hiring more employees. So, naturally, you must begin to pay those employees and have the cash to do so for the next month.
After 30 days, you generate an invoice for your service. And that's when the problem shows up. You won't get paid on that invoice for another 60 days, but you must pay your employees during that period.
The result is that you end up in liability, and the reason behind it is that you didn't consider the cash flow. Instead, you're overly focused on the revenue.
This approach creates severe problems that can end up in your company going out of business. To overcome this issue, you'll need to make cash flow the key focus of your business.
One of the best ways to do just that is to understand how to project profitability and use that projection to map out your actions and strategies.
How to Project Your Profits
One of the keys to projecting profits is to create a comprehensive sales pipeline report. This report will clearly map out what revenue and expenses fall on which month - critical data that would've been of great use in our example above.
With a pipeline report, you'll be able to understand what your profitability will look like on a monthly and annual level. This knowledge will allow you to predict your cash flow reliably and see how an action taken today will impact your business in the following 18 months.
Of course, the more detailed your report is, the better you'll grasp future changes in your cash flow.
The following are some essential tips for creating a good sales pipeline report.
Tip #1. Monitor Your Pipeline Metrics
Your sales pipeline shows you the prospect's location within the sales process, how many deals you can expect to close in a specified period, and where your sales reps stand regarding their quotas.
The sales pipeline produces several metrics which will affect your cash flow, so paying close attention to those metrics is necessary.
Valuable data you can get from your pipeline includes:
- The number of deals currently in the pipeline
- The average deal size
- Average deal close ratio
- Sales velocity or deal lifetime before closing
Tip #2. Track Your Revenue Growth Rate
This metric will show you whether the revenue that your company's generating is growing or declining. The revenue growth rate can show signs of stagnation over an extended period. Should that happen, monitoring this metric will allow you to course-correct and gear your agency toward growth.
Tip #3. Understand Your Average Deal Size
The average deal size can help you better predict future cash flow movement and form strategies to manage potential issues.
This metric represents the value of your pipeline. It's the number of currently active deals divided by how much those deals are worth.
There's plenty of room for improvement with average deal size, making the metric quite flexible. For example, if you determine a declining trend, you can shift your agency's focus to signing more valuable contracts.
Tip #4. Know Your Average Sales Cycle
The sales cycle is the time between signing a deal and closure. Once you understand your average sales cycle, you'll be able to formulate a concise plan of action according to the projections.
Another benefit you'll get from this metric will come from the changes you notice in your sales cycle over time.
If you see that the cycle's slowed down, you can analyze which factors led to the issue. On the other hand, if the cycle speeds up, it could mean that some part of your process became particularly effective. You can then determine what the outlier was and implement it across the company to improve overall results.
Profit Projections Can Save Companies
Monitoring key metrics and using them to project profits is a reliable way to ensure your company's heading in the right direction. Not only that, having a good grasp of your cash flow can help you avoid severe problems caused by a lack of foresight.
As a company owner, you'll need to be wholly committed to these matters. And with proper projections, understanding and managing your cash flow will become considerably less challenging.
Do you need assistance with monitoring vital metrics and projecting your profits? If so, apply to our agency accelerator program and see how we can work together to optimize your business.