Tuesday, 11 February 2020 12:16

Why cashflow is more important than profit Featured

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Top tips to get your business finances in shape

Have you started the year with renewed ambition to grow your business? If so, like many other business owners, you’ll probably be planning ways to increase your profits over the coming months.

After all, a healthy profit makes for a healthy business, right?

Unfortunately, that’s where many businesses get caught out.

The truth is, it’s cashflow that’s far more likely to make or break a business. And even profitable businesses fall down because they don’t have a handle on this vital lifeline.


According to the Office of National Statistics, cashflow issues are responsible for up to 90% of business failures.


So what is cashflow, and how can you manage it to make sure your business stays healthy and is able to flourish? We look at the key things to remember.

What is cashflow?

Simply put, it’s money that comes in and goes out of your business. It’s the dynamic ebb and flow of business funds. It’s what comes in from your customers buying products/services, investment etc. and what you pay out on expenses such as supplies, rent, staff costs, assets, insurance, tax etc.

What causes problems with cashflow? 

The main reason for cashflow problems, is an issue of timing. It can be hard to balance your incomings and outgoings over the year, particularly if the numbers fluctuate unexpectedly. And the key to cashflow is having enough money in the business at the right times to cover your costs – what’s known as being in ‘positive cashflow’.

Problems can occur for all sorts of reasons, such as:

  • when there is a big gap between doing the work for a project and being paid
  • when suppliers demand payment by a fixed time after delivery
  • when you have to pay for stock, staff and other costs before your client pays you
  • having to pay large costs up front, such as rent three months in advance
  • if you have a seasonal business which makes a stonking profit for part of the year but is very quiet for the rest of the time
  • if you lose a key client, while your overheads remain the same

Even when you are ready to expand your business, cashflow can bite you on the bottom. Such as when you need to invest in some equipment to offer a new product but you won’t start to reap the financial rewards for many months after you’ve bought it. It’s the same with taking on more staff, the costs can hit you way before you start to benefit from the extra resources.

So, unless you’ve planned your cashflow well, you could find yourself in a sticky situation pretty quickly. 

How do you manage business cashflow?

The good news is there are some simple steps you can take to manage your cashflow - and we’ve created a nifty online tool to help you keep on top of your business finances. 

  1. Work out a simple budget for the year. What are you predicting to bring in through sales and other income sources? What are your fixed costs? What variable and one-off costs might you need to cover? By listing these out, you can calculate your predicted profit/loss and you’ll have the information you need to plan your cashflow.

Pro tip: Why not try our online business equation tool which quickly calculates your profit/loss based on the numbers you put in, allowing you to try out different financial scenarios. It also automatically creates an example cashflow projection.


  1. Create a cashflow forecast by using the predicted income and costs from your budget and mapping them month by month across the year. You’ll know when certain things come in/go out, so put them in. And add other expected/potential costs as accurately as you can.
  2. Take some time to look through the figures and see when your pinch points might be. This means you can make smarter business decisions and take action before any problems occur – such as knowing when you need to boost sales, when to chase up late invoices, reduce costs etc. It will also show you when you can afford to re-invest in your business.
  3. If your forecast shows you’ll need a cash injection at a particular point, you may wish to meet with your Bank Manager to arrange an overdraft or loan. You are more likely to get this agreed if you have a budget and cashflow forecast in place as it shows you have considered all financial factors and that you are on top of planning the future of your business.
  4. Don’t forget to re-visit your cashflow forecast regularly to make any adjustments and keep a check on how things are going.

So, while it’s natural to want to keep a close eye on your profits, it’s vital to get a grip on your cashflow. As the lifeblood of your business, it’s the very best way to keep your business healthy in 2020 and beyond.

If you need help working out your budget or cashflow, please just drop us a line at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

Read 1292 times Last modified on Wednesday, 15 April 2020 10:53

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