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Do you ever worry that your business will run out of cash before it runs out of profit? This is a big concern for many business owners, and part of the problem is that many people confuse cash with profit.
Cash and profit are not the same, and when you understand the differences and plan for healthy levels of cash at all times, you can steady your business and make meaningful strategies for future growth.
In this blog post, we’ll look at many different aspects of cash flow and profit and make suggestions to help you employ tried-and-true tactics.
Having cash on hand puts your business in a more stable position with healthy buying power. While it’s true that you can borrow from time to time, cash is critical for growth, financial stability and crisis management.
When your business is in a position to build a new location, invest in research, improve your technology, hire new employees or purchase more inventory, cash is what you need. You’ll be able to manage these situations proactively instead of defensively when you have a healthy cash flow.
When you sit down to settle your income and pay your bills at the end of the month, it can be incredibly worrisome to realise that many of your customers have not yet paid you for goods or services.
One way to solve this problem is to reduce the number of days you allow customers to make their payments. Of course, if you allow too few debtor days, people may decide not to buy from you, so you need to carefully analyse the way you handle this issue and make a strategic decision.
By reducing the number of days you give customers to pay your bills, you will likely have to put fewer purchases on credit cards, and you’ll feel more comfortable making purchases. As you consider reducing your debtor days, think about offering incentives for customers who pay early or up front, charging additional late fees, tracking your invoices and staying on top of late payments and clearing up any questions that your customers have about payments.
When you look at your business records, can you show the difference between profit and cash? This is an important distinction because you can survive for a while without profit, but you need cash all the time.
When your business is profitable, it’s tempting to ignore cash flow and spend what you need to as you grow. But this can be dangerous. As a business grows, financial commitments come up, and it can be difficult to raise funds in the short term. At this point, you might have to sell something off in order to raise the cash. Clearly, this is not a good situation.
In order to successfully navigate your business, you need to pay attention to both cash and profit. This requires a strategic plan, a budget, and a cash flow forecast which needs to be monitored and updated with changes.
You’ll be better able to manage your cash flow when you understand your business’s operating cycle. Do you know how you spent your cash last month? If not, it will be impossible to create a workable budget and accurate forecasts.
Just as it’s helpful to know what you’re eating if you want to improve your personal health, it’s also important to know what you’re spending if you want to cultivate the financial health of your business.
Start your reckoning by calculating your monthly expenses like rent, utilities and labour. Next, add up how much it takes to acquire customers or clients and close deals. Next, determine how long it takes for you to get paid once you provide a product or complete a service. With this information at the ready, you’ll know how much cash you need on hand for your monthly operations.
Strong and forecasted cash flow gives you the ability to fund projects, planning, investments and unexpected payments. Without cash, opportunities will likely pass you by because you simply don’t have the resources to take advantage of them.
How much cash should you keep on hand? That depends on a variety of factors including your monthly cash flow requirements, your overall business strategy, your forecasts and the amount of risk you’ve taken on.
One of the most attractive aspects of having cash on hand is that you’re unlikely to default on your suppliers at any given time. Once you’ve built a good working relationship with a supplier, the last thing you want to do is be late on your payments.
Therefore, by maintaining a healthy supply of cash in your business, you can ensure that you treat your suppliers well and have a cash reserve in case of emergencies.
Is it possible to “cash flow” your way out of debt? Yes, it is. And as you do so, you’ll reduce your business risk and position your organisation for future opportunities. One of the best ways to start reducing your debt and risk is to pay off long-term debt. This may free up more cash, which can be used for other purposes.
You may need to cut back on some expenses for a time as you pay off debts. Create an “essentials only” spending plan until your debt reaches a more manageable level. Make sure you create specific goals to reach this point. You could also use the percentage method, in which you dedicate a certain percentage of your excess cash flows to paying off debts each month.
One of the greatest dangers to businesses is simply running out of cash. Without cash, you cannot weather the financial storms that inevitably hit businesses. In fact, running out of money is one of the biggest reasons that businesses fold early on in their operations.
That’s why it’s so critical that you get your cash flow under control as quickly as possible. Monitor your cash flow management, and always, always maintain a cash reserve. Collect your receivables as quickly as possible, and spend only on essentials until you have your cash where you feel comfortable.
For more help with your cash flow, or to talk with an adviser about any other business topic, get in touch with us at Altus Financial.
Set your business on the right path with this simple guide.
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