The foundational goal of any business is to make a profit. As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise. But how does profit differ from cashflow? And why is cash king?
How do profit and cashflow differ?
To really understand the difference between generating profit and managing cashflow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cashflow is an invaluable business skill.
Let’s take a look at the differences:
What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It's driven by creating a profit margin and generating value from your products and/or services.
What is cashflow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.
Why is positive cashflow so important?
‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cashflow then the business may not survive as long as the end of the year.
What’s needed is good cashflow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.
A business can generate high revenues and big profits, but still be cashflow poor. In other words, it can have profits at the end of the period, but have very little liquid cash to fund it's day-to-day operations over the course of the period.
Talk to us about improving your cashflow management
Good cashflow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cashflow’ you need to proactively work to keep your inflows higher than your outflows.
Here are proven strategies for improving your cashflow position:
Set up detailed cashflow reporting to closely monitor inflows and outflows. This enables you to catch potential issues early.
Build rolling cashflow forecasts to predict future needs. This helps you plan ahead to avoid risky situations.
Accelerate invoicing and collections processes to speed up inflows.
Take advantage of supplier payment terms to manage outflows.
Reduce unnecessary expenses that don't support core business goals.
Structure loans/financing to align with cashflow needs.
With some effort and discipline around these areas, you can transform your cashflow outlook and unlock new potential. Your financial health will empower you to be more agile and capitalise on growth opportunities.
As your adviser, we can provide tailored guidance on implementing cashflow management strategies for your unique business situation and detailed cashflow reporting and forecasting, so you can keep the business in that ideal positive cashflow position. And we’ll also look at key steps for keeping your revenues high, margins profitable and meeting your financial targets.
Please reach out if you want to discuss ways to get your cashflow working for you, not against you. Smart cashflow management is key to realizing the full profit potential in your business.
This post was originally published / written by BOMA and has been updated for freshness, accuracy, and to add extra content for comprehensiveness.