Can Your Profitable Company Go Out of Business?
The answer is a big fat YES!
Money in, money out. Cash flow is one of the most important measures of your business's health. But how do you monitor it?
It sounds simple enough to track your sales and your expenses and then just compare the two. But according to Xero it’s not that simple with a massive 65% of failed businesses saying they closed because of financial mismanagement, including issues such as lack of cash flow visibility. They simply didn’t know if they were making more than they were spending.
You may find it hard to imagine why a business would lose sight of cash flow. But it’s when you start your business that you realise tracking small business cash flow isn’t as easy as it seems.
The first few years for any new business are crucial to its long-term success, with many challenges to overcome and lessons to be learned about taking practical steps to help you control spending and grow your business without taking excessive financial risks.
Profit and cash flow may appear to be the same thing, however they are very different and it's important to understand why so you can take action before things start getting hairy.
Cash flow is the difference between cash received and cash spent in the process of doing business and is an important indicator of how your business is performing as it pays the bills and staff, keeping the business operational.
Profit (or net income) is revenue from the sale of your services and/or products (includes income that might not yet have been paid by your customers) minus all of your expenses The measure of profit is an important one to know whether you are making more than you're spending, which is why your Profit and Loss statement (P&L) should be the one report you should regularly review, as it provides information about a company's ability or inability to generate profit by increasing revenue, reducing costs, or both.
There are many reasons why you need to know your cash flow situation, you have to understand if you’re making money or losing it. That’s the most basic form of cash flow visibility. But there’s more to it than that.
If you can see your cash flow in detail, you can spot opportunities, or troubleshoot problems before they become too big.
If you’re seeing profit spikes during certain periods, you could:
bring in more staff to help maximise those opportunities
think of ways to cross-sell or up-sell those customers
consider marketing campaigns that will bring those customers back during slow times
If revenue is flat during certain periods, you could:
run sales promotions
experiment with different products or services
reorganise staff schedules to lower your expenses during those times
Cash flow visibility is a strategic advantage. By understanding how revenue and expenses change from day to day, you can tweak your business model to find what works best for your situation.
Money is the ultimate measure of business health and sustainability. You should watch it carefully, whether it is automated with cloud software like Xero or if you do it manually, updating your cash flow Excel spreadsheet or Google Sheet. The effort is well worth it, and you’ll feel more in control of your budgets and your business.
If, however, you’d rather spend the time growing your business or having quality time with your family, then get in touch to discuss how I can help you.
We offer an accounting package with a manageable monthly fee that includes quarterly BAS and business analysis, tax planning and end of year financials so you don’t get any big bills or surprises.
Click HERE to book in a free 15 minute call where we can chat
about how I can help and support you and your business.