Profit and cashflow are key financial measurements. However, many business owners aren’t aware that they are not directly linked, nor are they both equal measures of success.
Profit is a measurement of a company’s sustainability on an ongoing basis, while cashflow is a measure of a company’s ability to pay its bills when they are due. When there is a lack of cash resources, usually tied up in receivables or written off to bad debts, a company is vulnerable to failure, no matter what their perceived profit.
On paper, your business may be highly profitable but you still find yourself heading into cashflow crisis. Your income statement may well show that you made a ‘juicy’ profit, but that does not mean you have the money in your bank account! Cashflow is much more fluid and is therefore harder to predict, changing depending on circumstances and often varying from month to month.
Often smaller businesses or start-ups find themselves facing problems when they don’t implement the correct cashflow strategies into their businesses from inception. They are so anxious to “get the deal” that they completely ignore when and if their new customer can or will pay them. Yet, these are the two most important questions to ask from the start, and especially so for start-ups, when their ability to sustain late payments or non-payments is almost zero.
If your clients rely heavily on credit to pay for your service, are you carefully assessing their credit history? It is important that your company chooses quality debtors to lend to, rather than rushing through the process on the promise of a sale. Your books may show a profit, but if you are reliant on on-time payment from your debtors, your company may be at risk if they don’t pay on time.
Although a business cannot fully predict its future, it can look to historical trends and a well-rounded business plan to protect its cashflow for the year. Seasonal fluctuations and the cost of marketing campaigns should all be factored in when planning ahead.
The key point is that cashflow will always be king. Business-to-business sales are particularly vulnerable as they rely primarily on later payments. Profit does not mean cashflow and many profitable companies fail for lack of cash, spending money before securing their cash income.
Many businesses make the common but deadly mistake of focusing on overall profitability but fail to take cashflow into consideration.
It’s buried in the fine print and in convoluted contracts. Any cashflow solution must have flexibility. An agreed discount rate ensures that you pay only for the amount of funds used. Whereas line fees, account fees, unused facility fees are paid irrespective of the use of a facility.
It is now possible to establish funding lines to pay suppliers early and by doing so negotiate very real and significant supply input discounts. Specialist funding lines can assess the risk in such funding lines and most don’t require property security.
Import funding without the need of Letters of Credit, property or cash on deposit security. A game changer for businesses importing product but are constrained by payment terms.
Angus Sedgwick , Managing Director and CEO, tim. (The Invoice Market)