“Am I making any money?” It’s a question we get asked constantly, with what should be a relatively simple answer, but simply referring to profit is not enough. Profitable businesses can increase their net assets, but at the same time decrease their available cash. The reasons for this are many and varied, but can include increased levels of stock on hand, committing funds to the acquisition of fixed assets, or allowing trade debtors to ‘blow out’.
Having available cash allows a business to operate efficiently and achieve growth strategies far more easily. Opportunities are often difficult to pursue when a business is struggling with cash flow. Additionally, and perhaps most significantly, low levels of cash can increase stress levels for owners and key finance staff. Profit often means very little if there is no available cash to implement the business strategy and reward the owner’s investment in the business.
The value and importance of available cash make planning around it, and strategies to improve it, critical. All businesses should have budgets and forecasts around profit and cash flow. These budgets should be realistic as a tool for implementing business growth strategies by allowing the user to see the appropriate timing of significant expenditure. Seasonal businesses with significant fluctuations to incoming cash flows may also be able to recognise changes that can be made to their trading operations by undertaking detailed cash flow forecasting.
If the forecasting highlights issues with cash flow (or it’s become immediately apparent through trading!), strategies should be implemented to address the problems. Some of these are simple to implement, whilst others can require fundamental changes to how a business operates.
Successful implementation of cash flow strategies ultimately aim to increase cash levels, and subsequently reduce the stress of operating a business to give owners a lifestyle that running a profitable business should allow.
If you would like to know more about cash flow strategies and how to implement them, consider our ‘Peak Performance’ program. We will help you articulate budgets and forecast around profit and cash flow and plan to increase cash levels, monitor your performance and help you to achieve your goals.
The material contained in this publication is for general information purposes only and does not constitute professional advice or recommendation from Nexia Edwards Marshall. Regarding any situation or circumstance, specific professional advice should be sought on any particular matter by contacting your Nexia Edwards Marshall Adviser.