Nothing is more important than being solvent. It sounds obvious, but it’s our experience that most businesses that fail have at least one thing in common – they just simply run out of money.
Therefore, it is really important in the current market to understand the difference between cash in the bank and the true cash flow needs of your business.
Central to any success is a robust profit and loss and cash flow analysis to reveal your business’ true financial position at month end. Without this, you are really flying blind and can often be given a false sense of security that things are going well.
Cash in the bank and healthy profits can be misleading
- Business owners with large inventory holdings often make the mistake of seeing cash in the bank as healthy cash flow. In reality cash in the bank is only a ‘point in time’ measurement of cash before paying creditors.
- Healthy profits can hide a business cash flow issues, so it is important to look at cash flow analysis as well as the profit and loss.
- A measure of profit indicates the businesses performance but does not guarantee the existence of cash.
- Cash flow on the other hand is more dynamic and inline with the reality as net cash flow is the balance of cash being received and being paid out over a period of time.
- It is important to understand the difference between:
- the role of cash flow, which covers your business’ day to day expenses, and
- the role of profits, which are used to pay back debt and support long term growth.
Be careful of over trading
- When things get tight, increasing sales are often used as a way to regain sales momentum and clear stock. This can be a brilliant strategy. However, without the right controls and measurements in place this can also lead to incorrect sales and uncontrolled margins to the point where you could be not even covering the costs to run the business and you are actually losing money.
Avoid Temptation of bulk purchase discounts
- Be careful that you do not get tempted by bulk purchase discounts. Your stock ordering should be based on what you need in your business and not what suppliers are looking to sell. Otherwise, you may be left with money tied up in unsold inventory that may later need to be cleared at lower margins.
A good plan can help you now and in the future. It can help future proof your business’ cash flows by providing the ability to:
- Assess the current profitability of your business.
- Conduct an analysis of current cash flows.
- Understand current debt position and associated obligations.
- Assess current balance sheet position.
- Review strategic plans.
- Review business processes.
- Review personal expenditure/drawings from the business.
- Agree on an action plan.
We’ve seen thousands of successful businesses born of good planning. Whilst we can count on one hand the number of businesses born of good luck. Please contact us to discuss any of the above and join us at the upcoming business camp where we work through this and so much more.
Find out more at https://globalbusinesscamps.com.au/camp about the 28-30 March, 2022 Global Business Camp and register now.
If someone asked you what your ideal day is, what would you answer?
This year was a year where many of us have taken stock of what is important, refined our goals, and focussed on closing the gap between our ideal and our reality.
We’ll look forward to working with you again in 2022 and helping you to close that gap!
On behalf of all the team we wish you a safe and happy Christmas.