Being profitable and having cash are two completely different things. You could be a decent business but have
a negative cash flow, or you could have a positive cash flow but not be showing a profit. Naturally, you don't want to be in either of these boats.
Seeing as you’re here, you’re likely a seemingly profitable business but you don't have limited cash for one reason or another. There could be many reasons you lack money, but where there’s a reason, there’s also a
Profit vs. Cash - What’s the difference?
It’s essential to quickly identify where your business is lacking if you’re experiencing a lack of cash. The losses
may begin slowly but start snowballing your business into the ground if you fail to act quickly enough. To find
the root of your cash issue, we must first understand the difference between profit and cash.
Let's define a profitable business and a business with good cash flow.
A profitable business:
Put simply, a profitable business means a business's revenue can pay for all expenses and be left with cash left
over. Any business gains will have costs to pay. If a business can use its revenue to pay its expenses over a specific period and have a cash surplus, the leftover money becomes profit.
However, if a business can pay its expenses with revenue over a specific period but is not left with extra cash, this is called breaking even. Furthermore, if a company can't pay their costs with their revenue in a particular period, they are not left with any cash but are now in negative cash flow; this is not a profitable business. The Profit First Cash Management method educates small business owners on how to manage their finances
through an expert-led masterclass. Learn more about it here or Contact Us to discuss what’s on offer!
A business with good cash flow:
If your business earns more than its spending, it will show a positive cash flow. Various types do exist but overall, cash is the lifeblood of your business's day-to-day operations. However, if your business has a negative cash flow, it is spending more than it gains from customers and we want to make flipping that around our priority.
Profit shows the amount of money remaining after all expenses are paid. Cash is money that flows through a business, and the cash flow reflects the net cash moving in and out of it regularly. I know my business is profitable, so why don't I have any
There are many reasons your business isn’t seeing much cash, but the most likely reasons include:
1. You aren't clear on your financial goals.
2. Your investing is lacking.
3. Your prices are too low.
4. Poor accounting and poor cash flow.
Ironbark Industries Bookkeeping’s Profit First system allows new and existing businesses to understand their
finances from a more personalised perspective. Ask me how to get started today!
You Aren't Clear on Your Financial Goals
How will you measure any progress or success without a concise end game or goal? You’ll unlikely to succeed if you do not have a structured, calculated plan to hit goals on your journey to success. Goals include hitting target revenue and gaining a certain number of customers over a month. They can also include smaller but essential goals such as attaining a specific number of reviews on a product or service, staff improvements or training goals, and in-house competitions leading to higher sales. Goals can be a great way to funnel all areas of your business's efforts into one place, leading to profitable results and increased workplace morale.
Having structured, measurable goals will set you up to succeed while keeping you accountable for every action you take in quintessential business decisions. Each day, your business should take steps to bring you closer to hitting your specific pre-set accomplishments.
Your Investing is Lacking
You want to profit, and you want to expand. To achieve these things, you need to invest. Businesses don't start as huge, profitable powerhouses with hundreds of employees. Businesses start from the ground up and use their profit to invest in their operations.
This can help you offer more products, market to new groups of customers, and become a further finely oiled machine. If you haven't planned to reinvest your profits to expand your business, you are missing out on its true earning potential. You won’t be able to grow your business if you don’t prioritise investment.
Your Prices are Too Low
Pricing your products or services can be tricky. If you price too high, fewer customers will purchase due to seeking more affordable options. However, if you’re consistently and unnecessarily under-priced, customers may buy your product, but profit margins will remain slim. Market research on your targeted customers and learning about their buying habits can help you determine a fair price to sell your products or services. If you can analyse what your customers have paid for similar items, how in-demand your product or service is, and whether your customers want to shop online or in-store, you’ll have solid information on which to base your prices. At the very least, reconfigure your pricing to be affordable, fair, and able to turn a profit.
Poor Accounting and Poor Cash Flow
Small businesses often have poor cash flow planning. Accounting is a huge part of your business and can't be rushed or riddled with mistakes. There is little if not zero room for error and you must know how much money is coming in and out of your business.
You also need to remain aware of your profits and losses throughout specific periods. Poor cash flow can advance from a minor problem to a major one in minimal time, and you should ensure you always have a suitable amount of cash in your business. You also need to have enough cash to pay your costs when your accounts receivable and late payments haven't come through yet. Keeping these payments well managed will help maintain a steady cash flow. On top of that, you can hold off on payments to your suppliers until you have sold the stock provided; this is another top tip for stabilising cash flow when finances start looking a little thin.
A professional bookkeeper will keep accurate tabs on your finances and advise you on ways to avoid and fix problems when approaching financial difficulty. Bookkeepers also serve as a second set of eyes that can provide suggestions to manage and improve your cash flow and profit margins, ensuring your business stays in the green consistently.
Profit and cash serve important roles in your business, but overall, cash is imperative to prevent your
business from suffering.
Clear financial goals, smarter investing habits, reasonable prices, and good accounting practices will result in
positive cash flow and an overall financially healthy business.
Contact Ironbark Industries Bookkeeping today to discuss our accounting and
bookkeeping services, your specific requirements, or any other financial management enquiries.