Have you ever looked at your business finances and noticed something puzzling? You see a healthy profit on your tax return but when you check your bank account it doesn’t quite match up. It’s like having money on paper but not in your pocket. Don’t worry; you’re not alone in this. Many business owners experience the same situation and it’s all about understanding the dynamics of cash flow.
The Cash Flow Puzzle
Let’s start by unravelling this mystery. You see, there’s a difference between your profit and the cash you have on hand. The profit is what’s left after you subtract all your expenses from the revenue you’ve earned. It’s an important number because it shows how well your business is doing on paper. But here’s the twist: not every expense means cash leaves your business and not all cash payments show up on your profit and loss statement, instead they appear on your balance sheet.
Some of the expenses that get deducted from your revenue to calculate profit don’t require you to spend real money. Things like depreciation or amortisation fall into this category. They make your profit look good on paper but don’t necessarily boost your cash flow.
Another factor to consider is the timing of expenses and revenue. Your profit is all about what you’ve earned and spent within a specific period. However, this might not align with when cash actually changes hands. For example, you might have delivered a service to a client but if they haven’t paid you yet it can affect your cash flow. It’s like having done a job and waiting for your pay to arrive.
If you’re reinvesting your profits back into your business for growth or expansion, it’s a smart move for your long-term success. But it can temporarily reduce the cash you have on hand, even if your profit looks healthy. Think of it as planting seeds in your garden; you’re investing in future growth but it doesn’t mean you can pluck the fruits right away.
Debt and Loan Repayments
Here’s another twist: repaying loans and servicing debt can impact your cash flow. These payments reduce the cash available for other things. It’s like making monthly payments on a car loan; you’re reducing your cash but you’re also getting closer to owning the car outright. Your balance sheet reflects payments made toward liabilities but these transactions don’t impact your profit, as they’re not accounted for on your profit and loss statement
Mastering Cash Flow
Now that you understand the puzzle, let’s discuss strategies to manage your cash flow effectively. After all, having a profit on paper is great but having the cash to pay the bills and invest in your business is even better.
5 Strategies for Effective Cash Flow Management
1. Regular Financial Health Checks:
Schedule regular check-ins with your financial advisor to review your cash flow statements and identify areas where you can improve. It’s like a regular check-up for your business’ financial health.
2. Understanding Financial Statements:
Your accountant is your ally in navigating the financial aspects of your business, providing high-level insights and guidance. However, it’s also beneficial for business owners to have a basic understanding of their financial statements. This knowledge empowers you to engage more proactively in financial discussions, spot potential issues early and participate actively in charting the course of your business’ financial health.
3. Budgeting and Forecasting:
Create a solid budget and financial forecast for your business. This will help you plan for future expenses and revenue, ensuring a smoother cash flow. Think of it as plotting your business’ financial journey on a map. Once your budget and forecast have been set up, it’s important to regularly review and compare them with your actual results to track your financial performance.
4. Manage Accounts Receivable:
Ensure that your clients pay you on time. Implement efficient invoicing and collection procedures to avoid cash flow bottlenecks. It’s like making sure your customers promptly settle their bills at the restaurant. Facilitating prompt payments is key: offer online payment options, require upfront deposits and diligently follow up on overdue invoices. Each strategy is vital in maintaining healthy cash flow
5. Emergency Fund:
Just like in your personal life, having an emergency fund for your business can be a lifesaver. Set aside a portion of your profits as a safety net for unexpected expenses or lean periods.
Seeking more ways to boost business? Check out our 12 tips to supercharge cash flow, growth and productivity.
Business Advisory Services
In the end, it’s all about finding the right balance between profit and cash flow. Your profit is a key indicator of your business’ health but having the cash to fuel its growth and cover your expenses is equally vital. If you ever find yourself puzzled by the gap between your profit and cash on hand, remember that you’re not alone and there are strategies to bridge the divide.
Consider seeking professional advice, like our business advisory services. We can help you maintain a healthy cash flow and ensure that your profits are both earned and kept.
As your advisor, we can:
- Analyse your financial statements and cash flow to pinpoint areas for improvement.
- Provide strategies for better cash flow management.
- Offer insights into your business’s financial health and help you make informed decisions.
- Help you understand the impact of growth and investment on your cash flow.
- Teach you how to understand your financial statements and the story they tell you about your business.
Here are more ways to boost cash flow as we head full speed into the Christmas season, setting you up with momentum into the new year.
Your profit is like the scorecard for your business but cash flow is the fuel that keeps it running smoothly. Understanding the difference between the two is a crucial step towards managing your finances wisely. If you ever feel unsure or need assistance, our team of financial experts is just a call away. Don’t hesitate to reach out for personalised guidance. We’re here to help you make sense of the numbers and keep your business on the path to success.
So, when you look at your tax return and see profit but can’t quite find the cash in your business, you’ll know it’s all part of the financial puzzle. And with the right strategies, you can make sure that your profit isn’t just on paper; it’s in the bank where it belongs.
Ready to get in front of your cash flow management?
For professional guidance that gets your business moving in the right direction, speak to our team of experts at Carbon. We do more than help you start, we help support your venture into the future.
Check out more of our articles or just give us a call at 1300 454 174 for the answers you seek regarding accounting and tax, bookkeeping, virtual CFO services, financial planning, start-up investments, insurance brokers, and finance and lending.