Cashflow – all businesses have it
We have all heard the saying in business ‘cashflow is king’ but what does that really mean and why should you care?
Cashflow concerns is something that all businesses experience at some point regardless of size, industry or years of trading.
Before we look at how to solve cashflow concerns its key to understand why they occur in the first place. Sometimes, its not just one thing but a combination of decisions that has led a business into a position of cashflow concerns.
- Cash life cycle – each business has a life cycle how cash moves through the business, the timing of when money needs to go out of the business for supplies or products, verse the time it takes to receive money from clients or customers with the overlay of covering fixed costs.
- Growth – quickly increasing purchases to gear up for an opportunity before the rewards and income is realised.
- Margins – difference between what buy/provide products and services compared to the sale price of those products or services. The margin needs to take into account not only acquiring your product or service but also all the other costs that are incurred to get it sold to the end client + fixed costs + tax + profit margin.
- Understanding – there comes a time where a business owner needs to move from working in the business to working on the business. Each business / industry has a different personality throughout the year, i.e. quiet periods, ramping up and boom.
- Systems – clearly define the way of following the money (cash) through the business. Policies and procedures how debtors are followed the controlling who can spend money.
There is one comment we hear from non-clients before they come onboard “we make a lot of profit, never have problems getting finance BUT we are always worried about the balance in our bank accounts”.
The reason behind this statement is there is a clear difference between profit i.e the amount of money the business has made and reported to the tax office verse the actual flow of money through the bank account.
Lack of cash management can kill a business long before reported losses. Strange comment I know, but think about the definition in the previous paragraph. Should the business not pay rent or suppliers then there is no business.
The solution to correct cash flow concerns isn’t a click your fingers solution. Unfortunately!
Tune in for the next article on potential solutions and cash flow funding.
Need solutions to your cash flow concerns?
Stay tuned for more blogs to come!