As a business owner the main goal is to make a profit. To make enough sales at a big enough margin to generate a profit from your business. It can be very common for any business owner to make a profit but then have issues with cash flow. Often business owners are confused as to why they made a large profit but have no money in the bank.
Simply put, your profit is what you are taxed on at the end of the financial year. It’s the income left once you have paid all your expenses and suppliers (does not include debt repayment). Whereas your cashflow is what is in your bank account as money comes in and out of the business on a daily basis.
An example of how profit and cash are different is Debtors – the people that owe you money. When you invoice a debtor, you add that to your sales and therefore your profit, and you pay tax on this. However, until they pay for the service, you don’t get the cash into the business. Therefore, managing debtors is one of the many key functions in managing the cashflow of your business.
Without an even and predictable flow of cash into a company, you can’t cover your overheads, pay your employees, or run day to day operations – let alone, considering growth for the business. Essentially, profit can mean nothing if you haven’t got the cash flow to keep you going. It is the lifeblood of any business.
In both commercial and agri industries we often see businesses caught in the cycle of growing sales and chasing or increasing milk production, however very few stop to review their profit margins. At the end of the day, you can make as many sales and kgs of milk as you like but if there is no profit margin, there is no profit and if there is no profit there is never going to be any cash.
One simple way to start the ball rolling on improving profit margin is to consider setting or reviewing your KPIs or key performance indicators. These are like your dashboard on your car. It tells you how fast or slow you are going, whether you have enough fuel, oil and water. It gives you an indication about whether you’ll make it to your destination. It’s the same in business. Your dashboard in business are your KPIs essentially, they are the things that will tell you if you are on or off track in relation to your plan.
Some important KPIs can include;
Commercial
- Gross profit percentage
- Debtor days
Dairy Farming
- Profit per ha
- Farm working expense per kg
As we head into the end of 2022, it is a time for reflection. How much profit did I make? How much cash did I generate this year?
Projecting your cashflow pipeline over the next 12-18 months is vital in the current business environment to take the appropriate action to safeguard your cash position. You can’t fix a problem if you don’t see it coming. A cashflow forecast allows you to plot inbound and outbound payments monthly so you can better predict what will be in the bank at the end of each month.
Whether you are new to running a business or a seasoned owner who needs some financial support, we can give you the cash flow advice you need. We’ll review your finances, delve deep into cashflow and come up with key ways to increase cash income and reduce expenses. It only takes a few small changes to achieve a far better cash flow position for your business to help you maintain positive cash flow and generate meaningful profits.
Get in touch with us for a Cashflow Improvement Meeting.
Amy Coombes
Director, CA
