Profit Versus Cash 

One of your main aims when running your business is to make money. However, despite making reasonable profits you are seeing a distinct lack of cash in your bank account – why? 

Profit is vital for the long-term success, but cash is the lifeblood of any business and without it you will fail much sooner. 

If you don’t have good cashflow you cannot pay yourself, your staff or buy essential goods and services required to run your business. You need cash to help you grow, to invest in new technology, training, staff, and potentially outsourced services. 

Here are some common reasons business owners have less cash than they expect. Do any of these reasons resonate with you? 

• Reinvestment in the Business – have you bought fixed assets for long term use in the business? Have you invested in new infrastructure and systems? Such behaviour can lead to long term success, but in the short term to less cash being available for you. 
• Stock of materials – have you tied cash up in purchasing too much stock that will take time to be converted into sales and cash? Stock levels need to be managed carefully so as not to tie up cash for too long. 
• Monies owed to you – are your customers paying you on time and within agreed credit terms? If not, then you don’t have as much cash in the business as you expect. Chase up debt regularly to improve your cash flow and bank balance. Conversely, are you paying suppliers too quickly? 
• Low Profit Margins – are your costs higher than anticipated? Are you making much smaller margins on your sales than you predicted? If your operating costs are high, they soon add up and even with substantial turnover, they can quickly consume your income. 
• Tax obligations – if these are not planned for and monies ring fenced in readiness for tax payments, taxes can significantly drain available cash when you come to pay them, causing you to have less working capital in the business. 
• Lack of financial planning – poor budgeting or accounting practices, trying to do too much too soon, and expanding without a sound financial plan can quickly lead to cash being drained from the business. 

To address these problems, you may want to look at  

• Reviewing your financial plans and forecasts. 
• Focus on effective cashflow management. 
• Review prices, margins and costs. 
• Re-evaluate your business model.

Here are Beansprout we help small business owners get very clear on the difference between profit and cash.  If you know you are working really hard and turnover is good, but cash is an issue we can help you to look at the improvements that can be made to improve the situation. Need to invest to grow, but not sure the cash to do it is there? Again our team can help create a plan and improve cashflow.