S.E.R.P.I.C.O. made me do it!

Acronyms are helpful. They make important lists, guides and instructions easier to remember so that they’re easier to implement. 

S.E.R.P.I.C.O. serves that purpose beautifully. Not only is Serpico a 1970s Al Pacino classic about a New York detective uncovering corruption on the force, but it also reminds us of the 7 Deadly Cash Flow Sins that are corrupting our ability to turn a profit.

So, what are they?

Sales

The first deadly sin is sales. Are you focusing on topline revenue as the most important number in your business? If you believe that, it is a deadly sin that is going to kill your business.

If, however, you are focusing on net profit and positive cash flow as the most important numbers in your business then you are on the right track.

Revenue is vanity, profit is sanity, and cash is king my friends!

Expenses – and why turning your back on them can lead to disaster

Are you thoroughly looking at your expenses each month to capture redundant subscriptions, reduce and amalgamate costs, and monitor expenses as a percentage of revenue based on your industry benchmarks? 

Receivables

Now, “Anyone can sell something for nothing,” Sadly, I see this sin cause lots and lots and lots of businesses to go broke. So, in terms of your customer invoicing and collection systems, you’re not a bank so don’t act like one. Invoice promptly and collect money immediately before delivery of products and services. Remove barriers for your customers to pay by taking credit card and smart automated systems. 

Payables – avoiding cash flow gaps is critical

It is best to pay your suppliers as late as possible and put your staff onto a fortnightly schedule to ease cash flow.

Inventory

The next deadly sin is around inventory. If you don’t sell things in your business, if you sell services, this one’s not relevant to you. If you sell things, if you sell products, are you selling your stock and collecting the money before you have to pay your suppliers? 

Cash – spoiler: cash in bank does not equal profit 

This deadly sin around cash relates to the sin of running your business on the cash in the bank. It’s a big no-no. 

If you are looking at your bank account to try and see how your business is performing in terms of profit and cash, rather than looking at your financial statements, that is a sin.

Owner drawings

So many entrepreneurs are taking a drawing rather than putting themselves through the payroll, which is sometimes necessary depending on the structure you trade through. Are you ensuring that the money drawn out of the business monthly does not exceed your net profit minus money you need to reserve for obligations that don’t appear on your profit and loss statement, like loan repayments and employee entitlements?

As you can see there’s one of the 7 Deadly Cash Flow Sins attached to each section, and together, they have put many businesses into jeopardy. By understanding them, you’re on your way to embracing best practice and the rewards that come with it.

Remember S.E.R.P.I.C.O

Article by Kay Godfrey, Owner of Up Up and Away Bookkeeping Software Consulting and a Mentor with Inspiring Rare Birds