“I’m making a profit but I don’t ever seem to have any cash, why is this?”
This is a pretty common question or statement I get from business owners.
I recently heard this great quote at a business breakfast – “Turnover is Vanity, Profit is Sanity but Cash is Reality” which in my opinion is absolutely spot on! For example you might have a $10mil turnover with a $100k profit & no cash in the bank… which is generally a good indication of a business owner wearing bucket loads of risk for little or no return.
If you are faced with this scenario then you need to better understand where your cash is going.
Other scenario’s might be when you’ve won a new work contract or just experiencing organic growth within your business. In these situations you must have ample to cash to survive this growth! With growth comes increased expenditure which is often incurred prior to receiving any additional revenue, at this point you need to understand what cash options you have to get you through this period!
These exact everyday scenarios that I see business owners face has prompted me to write about how I believe you can better manage cash and/or cash shortages within your business.
1/ Complete a cash flow
This extends to both new and established businesses! There are plenty of free cash flow forecasting tools online, one even provided by the government. I normally work on a monthly cash flow as most payment terms are 30days.
Start with what are you forecasting your income to be?
What are the business expenses?
What are your business financial commitments?
If you draw a wage from the business what are your personal expenses & commitments?
Now what money do you have left over?
Sometimes this can then answer a few questions for what is and isn’t viable within your business.
2/ Understand your balance sheet
Great you made a profit last year! The P&L Statement can often be the glossy side of the business, but its also important to understand what is happening over on your balance sheet as P&L statements don’t take into consideration your future and ongoing loan commitments.
Understanding balance sheet activity and what cash is available will assist when making business decisions!
If you are unsure, ask your accountant for advice or assistance on this.
3/ Know Your Options for Cash Shortages
Knowing what your options are when a cash shortage arises will makes it much easier to manage the cash flow situation. Some of these options might include:
• Setting up trade accounts for materials/fuel
What expenses do you have with other businesses?
Will any of your suppliers allow you to have a 30day account?
They may require you to apply for a trade account through a credit application process but doing this may just give you the extra time you need before you get paid.
• Applying for a Bank Overdraft
This is often seen as the cheapest and most flexible form of bank funding for a business’s working capital short fall.
Whether or not you are applicable for this form of funding is generally assessed against the financials from your business. Depending on the size of the overdraft you require and the strength of your business will depend whether it is a secured or unsecured facility.
• Applying for Cash Flow Finance
Generally unsecured borrowings are available to established businesses and will be based on your bank statements. This is generally a short term funding option for between 3-12 months.
• Access to Debtor Finance or Invoice Financing
Generally only available for established businesses.
This method of funding gives businesses the ability to get advances on invoices or receivables and can be particularly useful for growing businesses or for businesses with drawn out payment terms.
• Using Credit Cards
I’m sure you know what a credit card is! And this might just be that little kicker to see you through a slow period.
• Get a Family Loan
I’ll let you be the judge of this one! Family Loans can be great & low cost but can also become very complicated depending on your ability to pay it back.
4/Establish Multiple Bank Accounts
I’m hearing you! More accounts, more cards… sounds like more confusion.
Well, not really. I believe having multiple accounts allows you to have better management over your money as it means you can distribute income once received!
For example, a common statement I get is I have a GST/BAS bill but don’t have the cash. My answer to this is well, what did you spend the money on?
Most banks can establish a GST holding account on your behalf so that you can put the GST money aside when it is received.
I would even consider going one step further and working out exactly what your operating costs are for the business each month and allocating that into a separate account… allocating income/funds when received will quickly tell you what you have left in reserve.
5/Work With A Professional
No you are not alone! And if you do find it all too hard, then help is always available!
Speak with your accountant, but go prepared with all your financial information & get them to sit down with you and go over all the financial information for your business.
If you don’t feel comfortable doing a cash flow forecast yourself then also get them to create one for you. When doing this its best to be as accurate and honest as possible with the information you provide so that you can have a cash flow forecast that is a good reflection of your businesses overall position.
Don’t feel like working with an accountant?
Then try a bookkeeper! And get them to go through your statements and explain to you where your cash is going.
Hope this post helps you when managing cash within your business.
P.S. If you have any questions about this post or how I may be able to assist you in obtaining finance for your business, please contact me on 0431 177 605 or via the contact us form..