‘My business is very profitable, but we never seem to have enough cash in the bank to pay our bills’
The ‘signs’ of a healthy business are not just turnover and a healthy profit.
Business owners will often say to us ‘My business is very profitable, but we never seem to have enough cash in the bank to pay our bills’.
If your business makes a decent profit but there is no money in the bank, we explore a few possibilities:
- Your accounts receivable balance has gone up – which means you’ve made the sale but not yet received payment
- You’ve used your cash to purchase that new asset for your business
- You’re carrying more inventory in either volume or value – your suppliers love you, but you have more inventory on hand than last year
- Your accounts payable balance has gone down – your creditors love you for it but not your bank manager
- You reduced your financial liabilities – you’ve paid down your loans, credit cards or finance contracts – now your bank manager will love you too
- A sudden dip in trading has led to you using your cash reserve for paying overheads
- And lastly, you paid yourself a dividend or borrowed money from the business – so you’ve got the money but the business bank account is empty.
In summary:
Cash flow = Profit +/- changes in Assets, Liabilities and Equity
Your business position can be evaluated by considering your free cash flow and your operating cash flow. In this current economic environment, if your business has experienced changes, whether they be staffing, income or expenses, your cashflow metrics become increasingly important.
Active cash flow management can substantially improve your bank balance. It will also play a big role in alleviating stress caused from not understanding your business position. At GENFOCUS we work with our clients to help them understand, we may prepare a cash flow forecast but there are several ways we can approach this. We see this as a valuable part of our role as advisors.
Disclaimer: this information is of a general nature and should not be viewed as representing financial advice. Users of this information are encouraged to seek further advice if they are unclear as to the meaning of anything contained in the article. GENFOCUS accepts no responsibility for any loss suffered as a result of any party using or relying on this article.