Have you ever looked at financial statements and seen a big profit, yet you are struggling to pay the bills? This is because profit and cash are not the same thing.
Without cash your business will not survive.
Cash is the life blood of any business… without cash your business cannot survive. In fact, very profitable businesses sometimes fail because of poor cashflow.
When a business is growing fast – often in start-up mode, it needs ‘working capital’ to fund that growth. This is because the business is having to pay for stock, fund payroll costs, pay overheads and buy new assets. This is before the business even gets to bank the cash from selling its goods or services! That’s why it’s called working capital, because that capital must ‘work’ hard!
Understand your key cashflow drivers
The fact that the business is making a profit on paper, and yet cash is tight, is precisely why every business owner needs to understand their drivers. These are the business processes that affect it. Processes like the way you order stock and pay for it, how you bill for your services and the steps you take to make sure you get paid by your customers, just to name a few.
Managing cashflow is all about your business processes
Often businesses are asked to complete a Cashflow Forecast by the bank, perhaps because your overdraft is blowing out. When that happens, preparing a Cashflow Forecast is vital, however every business deserves a Cashflow Forecast. This should be one of the first things you do after you’ve completed your annual one-page Business Plan, every year. It’s simply best practice in business.
Be prepared to make process changes
But simply preparing a Cashflow Forecast every time the bank asks for one is not going to fix the underlying causes of poor cashflow. Borrowing more money from the bank is not a long-term solution, and it costs you interest.
By looking for the underlying causes of your poor cashflow and making some changes to improve processes, you are not just treating the symptoms, you are remedying the cause. This will help your cashflow, and perhaps, more importantly, it will build a sustainable and more valuable business. Knowing you are in control of will also reduce your frustration and stress levels enormously.
Register for our free Cashflow Improvement event
Helping our clients look ahead with confidence and putting in place simple cashflow maximisation strategies is core to our purpose as accountants. If you think you need a better understanding of it come along to our free event. Click here for more details.