Cash is not profit and vice versa
The purpose of a business is to make money, and that means you need to know the difference between profit and cash flow.
Net profit is what you have left after you deduct all your business expenses from all your revenue. You can improve net profit only by changing the things that affect revenue and expenses.
For example, if:
- You renegotiate with your suppliers, you may get stock cheaper, or carry less inventory
- Your staff engage with customers better, you can learn more about what they do and don’t like – and get more business
- You can roster staff differently, you may be able to run your business more efficiently.
Cash flow comes from various sources. However, it also covers operating expenses, taxes, equipment purchases, repayments, distribution, and so on.
Note that a profitable business does not always have good cash flow. And a business with good cash flow is not always profitable. For example, you can have good cash flow, and loss-making expenses.
To work out how fast you can grow your business, look at your projected cash flow. We can advise you on this.
Keeping cash crowned as King
Your business can’t survive without cash.
The following six takeaways are essential for business success:
- Protect your cash position, by knowing what it is. Build a cash flow statement and always keep it up-to-date. If you foresee a shortfall, start at once to fix it.
- Create a cash buffer as an insurance against unexpected difficulties.
- Protect your cash position against revenue shocks, by maintaining a balance equivalent to at least two months of operating expenses.
- Be realistic with revenue expectations. Take action now if it looks like sales are not going to get you to breakeven.
- Credit checking up front will reduce the risk of customer non-payment. Make sure you follow up with clear payment terms agreed in writing. Communicate regularly with customers and automate where possible.
- Every dollar you spend reduces cash reserves. The best way to protect your cash is to create a budget for the spend you know you need, and stick to it.
