Small businesses typically have cash flow problems. However, it is hard to understand why if your business is making money. The reality is many businesses fail because they don’t have sufficient funds to keep their operations running.
Being profitable doesn’t mean you have cash. You can make profit only after you’ve generated sales and taken care of all expenses. Obviously, you’re required to pay tax on any profit you earn. The amount that remains is then spent on the business or shared to investors.
You need cash for daily operations. There are many sources where cash can come from – profit being one of them. The other ways of generating cash is divesting assets, giving your own money, getting bank loans and signing up new investors.
Determine the Right Time to Spend.
Always remember to not spend profit in your business – spend cash – and spend at the right time. The old saying “You have to spend money to make money” is true. To earn money, you first have to buy goods or services to sell. This means you require money before you make a sale. You earn a profit by selling a product or service at a price that is higher than their original. Bottom line is: you get the profit after you spend the cash.
Another timing issue, which trips most businesses, is giving credit to customers. The longer you receive payment from your customer, the longer you wait for the cash while you have monetary obligations to fulfil such as salaries, stock and other expenses. This is the point where the problem starts and frequently culminates.
Pay Attention to What’s Important.
You have to pay attention not only on your profit but also on what propels your cash flow. If you have payment obligations that need to be met on time, then you require sufficient cash to pay for these while you await payment from your customers. Monitor your accounts receivable and follow up on late payments to help keep your cash flow going. Another thing to take note of is if your suppliers give you credit, this may allow you to not pay for the stock until you have sold it – which could deliver a significant boost to your cash flow.
Your business will need to be profitable in order to stay afloat, but you also need to be cautious when forfeiting profits to earn cash. Giving discounts for early payment will strengthen your cash flow but will cut down your profit. To relieve the dilemma of cash versus profit, the best course of action is to ensure you have sufficient cash to pay for ongoing costs. You could go for getting a finance facility to tide you over when you’re short on cash, but the downside is you have to pay fees and interest, which will reduce your profit.
PJS Accountants offers expertise in helping improve your business and take it to the next level. We can help you come up with a custom plan to implement your business strategies and methodologies, boost profit and increase market shares. Contact PJS Accountants for enquiries.