The goal of any business is to generate profit, and achieving this requires a thorough understanding of the difference between profit and cash flow.
Net profit is the amount remaining after all business expenses have been subtracted from total revenue. Enhancing net profit involves adjusting the factors that influence both income and expenditure.
For example, you might:
- Negotiate better terms with suppliers to lower stock costs or reduce inventory holdings.
- Encourage employees to improve customer interactions, enabling you to gain insights into preferences and potentially secure more business.
- Adjust staff scheduling to improve operational efficiency and reduce costs.
Cash flow stems from multiple sources, but must also cover operating expenses, taxes, equipment purchases, loan repayments, and distributions, amongst other outgoings.
It’s essential to recognise that a profitable business does not automatically equate to strong cash flow, and a business with good cash flow may not necessarily be profitable. For instance, a business could have solid cash flow yet incur loss-making expenses.
To assess how quickly your business can grow, you should closely examine projected cash flow. We are available to advise you on this.
Ensuring Cash Remains King
No business can continue to operate without sufficient cash flow.
Here are six essential steps for maintaining a healthy cash position:
- Know your cash position. Prepare and regularly update a cash flow statement. If you anticipate a shortfall, address it immediately.
- Build a cash buffer to protect against unforeseen challenges.
- Protect against revenue shocks by maintaining a cash balance equivalent to at least two months of operating expenses.
- Be realistic in your revenue forecasts. If sales projections suggest you may not reach breakeven, take corrective action early.
- Conduct credit checks on customers before extending terms to reduce the risk of non-payment. Ensure payment terms are clearly agreed in writing and maintain consistent communication with customers, automating processes where possible.
- Every dollar spent reduces your cash reserves. Establish a budget for necessary expenditure and adhere to it rigorously.
If you’re seeking to improve your cash flow get in touch with us. We’re here to provide professional support.
