A business exists to generate profit – but profit and cash flow are not the same thing, and both must be understood to manage a business effectively.
Net profit is calculated by subtracting all operating expenses from total revenue. To improve profit, focus on the areas that drive revenue or reduce costs. For example:
- Negotiate with suppliers to lower purchase prices or reduce inventory requirements.
- Equip staff to better engage with customers, increasing sales and gathering valuable feedback.
- Review rostering to enhance efficiency and reduce wage costs.
Cash flow reflects the timing of cash moving in and out of the business. It must cover overheads, tax obligations, equipment purchases, loan repayments and distributions.
Importantly, profitability does not guarantee good cash flow – and healthy cash flow does not necessarily mean the business is profitable. A business may have strong inflows but still record accounting losses due to depreciation or other non-cash costs.
Your cash flow forecast is the best indicator of how quickly you can expand. Sound forecasting ensures growth is sustainable. We can prepare projections to support your planning.
Six Key Practices to Protect Cash
- Track Cash Position Regularly: Prepare and update your cash flow statement frequently. If a shortfall is predicted, address it without delay.
- Maintain a Reserve: Keep a cash buffer to absorb unexpected expenses or downturns.
- Hold Sufficient Working Capital: Aim to retain at least two months’ operating expenses in available funds.
- Be Realistic About Sales: If revenue is trending below breakeven, take corrective action early.
- Strengthen Debtor Management: Perform credit checks, set clear terms, follow up promptly, and automate reminders where possible.
- Control Spending: Budget carefully for necessary outlays and monitor actual spending to avoid depleting reserves.
We can help you strengthen cash flow management and put effective controls in place. Contact us to arrange a review of your cash position.
