Understanding Your Profit and Loss

Running out of cash in the business is unfortunately very common. Few business owners sit down and think “How much cash do I need to run my business?” They tend to come at it from the other angle and say “I will sell this much and by the time I’ve paid the expenses there should be enough left over to pay me and leave some profit”. At first glance, this seems like a reasonable expectation. Unfortunately, this thinking leads to a poor cash flow situation, and the more you sell the worse it gets! You’re thinking how come there’s never enough cash to pay for everything?

The problems start with the timing of things. Customers don’t always pay on time, however, suppliers do like to be paid on time and will let you know very quickly. In the meantime whilst you’re waiting to be paid by customers, the bills are piling up and staff and the tax office have been paid and there’s nothing left for the business owner to be paid, let alone any profit!

The place to start better business cash flow management is to know exactly what impacts cash flow and by how much. The key issues affecting cash flow are sales, costs, overheads, pricing, customer payment terms, supplier payment terms, stock movement, jobs in progress, finance, and taxes. Once you start to focus on managing each of these, the result will be better cash flow.

If you can speed up the time customers take to pay, slow down the time to pay suppliers, closely manage and reduce costs and overheads, get your pricing right, so it well and truly covers the cost of your product/service, keep enough stock to meet customer demand but not too much, get jobs done quickly and efficiently so you can invoice them and get paid, minimize finance costs and manage taxation well, this is a great start to good cash flow management.

To learn more about good cash flow management and see tools to help you manage it better take a look at our resources, join our Financial Wellness waitlist, or take a look at our business coaching.