By Tina Zawila
One of the most common questions we are asked by clients is “You say I’ve made a profit, but where is it?”. Often profitable businesses struggle with cashflow and unfortunately some go broke! This might seem like an oxymoron, a profitable business going broke, but it happens more than you think, and it’s simply due to poor cashflow management.
Businesses are most vulnerable when they are in a start up phase where the business may be undercapitalized from the start, but it also happens to more mature businesses that are in a growth phase. Commonly, a growing business is offered a lucrative project or contract or have an idea for a new product or service, which on paper is very profitable, however, it may require significant cash upfront or during the project (to pay for supplies or labour) well before you get paid by the client or customer. And quite simply, the business runs out of cash before it has a chance to complete the project and get paid. It’s vital that business owners consider the cash impact as well as the profitability of any new product, service or project.
Sometimes businesses struggle with cashflow because it’s sitting on their shelves as stock or it has been invested in work in progress that has not been completed and billed to the client. It is important to manage stock and to monitor when it is ordered and how long it takes to sell. Business owners that undertake projects for clients that result in an investment in labour and materials (work in progress) should also carefully manage these projects and look to shorten timeframes as much as possible, or alternatively ask for upfront deposits or progress payments from their customers.
Managing the amounts owed to you by your customers (Accounts Receivable or Debtors) is also a critical business activity that should not be overlooked. Often your cash is sitting in your customer’s bank account! No one particularly enjoys following up their clients to ask for payment of invoices, however, you need to remember that you are simply asking for your money. Have a Debtors System and follow it. Send your invoices promptly, be clear about your trading terms and due dates, and follow up regularly and consistently. The squeaky wheel gets the oil!
Finally, when you are reviewing your financial statements (which you should do regularly) you should be as familiar with your Cashflow Statement as you are with your Profit and Loss Statement! And if you have never seen a Cashflow Statement, then you should ask your accountant to provide you with one or look for it in your accounting software.
If you need help managing cashflow or reading and understanding your Cashflow Statement call the professional business advisors at UHY Haines Norton on 07 4972 1300, we would be happy to “Show you the Money”!