Is your business realizing great profits but still feeling the pinch each month? There may be a number of reasons for this, but more than likely you’re experiencing cash flow problems.
It’s a mistake many businesses make – focusing on overall profitability but failing to take cash flow into consideration (cash flow problems are, by the way, the #1 reason why small businesses fail) when reviewing their books.
Believe it or not, your cash flow statement is a truer reflection of your business’ financial health than your P&L report.
Even if your business is the most profitable in town, but you can still find yourself in a cash flow crisis.
That’s because profit margins (what’s left from your sales revenue after your expenses have been accounted for) only take into consideration your income and expenses at a certain point in time. Cash flow, however, is fluid, harder to predict, and can change from month-to-month depending on circumstances.
For example, a late-paying client or unexpected outgoings can erode cash flow very quickly. As your expenses start to add up and exceed your income, then you have a cash flow problem.
Flip the above scenario on its head – your business is cash flow positive (meaning your income balances your outgoings). Great! However, this is no guarantee that your business is a profitable one. Startups who are yet to break even often find themselves in this predicament, i.e. they are spending more money to get the business started than they are yet to make.
So how do you reconcile profitability and cash flow management? Look at it this way – realizing a profit is a long-term goal, it takes time. Most businesses will incur losses on the way. Cash flow, however, is a best practice that you need to understand from the get-go, master overtime and sustain for the lifetime of your business. Cash flow really is king.
So how do you reconcile these two success factors?
This is where your financial statements can help. Here are a few tips for leveraging available tools and practices:
Setting-up and staying on top of your financial statements is key to understanding how cash is flowing in and out of your business. Software can help, but get a good accountant too, even if it’s just to get you up and running.