Profit is of little use to a business if it has insufficient cash to be able to keep operating.
But hang on, how can a business have profit but no cash you might ask?
There can be many reasons why a business has profitt but no cash, and we’ll cover off those reasons below.
Before we do, we would like to define what we mean by “cash” and “cash flow”; and we’re not talking about the payment method (i.e.cash or card option), we are actually referring to the flow of money in and out of your business and more precisely, the timing of the flow of money in and out of your business.
Therefore, the art of cash flow is about smoothing out the peaks and troughs associated with the movement of money in and out of your business so that your business is never caught out, and if it ever is you would have enough foresight to be able to do something about it before it becomes an
The statistics dont lie!
Based on a recent survey, it has been reported that only 48.9% of Australian businesses are cash flow positive. And to add further context, cash flow issues for small businesses is a global issue with over 82% of failed businesses experiencing cash flow problems.
Cash flow for growth
For businesses that wants to acheive growth, the 2 prerequisites to growth are profit and a positive cash flow that can be reinvested.
A cash flow forecast provides the foresight needed for businesses with growth ambitions to thrive and to ensure that growth is sustainable.
A cash flow forecast will allow you to understand your cash flow cycle, which is the time between when purchases are made (for stock, materials, equipment, salaries) and when payment is collected from sales.
While every business and its life cycle is different, the easiest way to know if your business has a cash flow problem is if your current expenses exceed your existing cash.
What is the solution?
Whilst many would think that the easiest solution is to simply sell more, that wont necessarily resolve your cash flow problems and it takes time, time that a business with cash flow issues may not have.
You also need to resist the immediate temptation of discounting your product or services.
The first step is to understand the true nature and extent of your cash flow issues. After all, it may be a once-off temporary cash shortfall for which you wont need to panic, nonetheless, you’ll realise the power of forecasting and your ability to foresee your cash position.
On the other hand, through forecasting you may realise that the issue is just beginning and drastic measures may need to be taken to ensure your business doesn’t become another statistic. At least you now know the full extent of your problem which will place you in a better position to resolve it.
Forecasting will allow you to understand the measures you will need to take, which should include:
- Micromanaging spending
- Benchmarking your costs
- Collecting debts & negotiating terms
- Staying on top of your bookkeeping & accounting
- Bank overdrafts and other forms of finance
What are the next steps?
The next step is to create a detailed cash flow forecast together with a budget so that you can proactively manage your cash flow going forward.
If you are still unsure whether you have cash flow issues or want to chat with us to redeem a free cash flow review for new clients, simply contact us on 1300 878 876 or send us an email to firstname.lastname@example.org quoting “Free Cash Flow Review”.