Looking after your cash flow
by
Hill Mayoh
Why is it that clients often ask me the question “The business is profitable but where has it (the profit) gone?”
It is a well known and documented fact a lack of cash flow will bring a business to its knees before a lack of profit.
Let’s look at profit versus cash flow. A business can only run so long without profit even if it has a good (positive) cash flow whereas a profitable business with a poor (negative) cashflow is viewed as a far better proposition. Why? It is normally easier to fix cashflow problems & eventually the profit will assist the cashflow to turn positive. We also see businesses invest in say a low profit, high cashflow business to help its other profitable businesses with perhaps a negative cashflow.
We as Business Owners & Managers use a lot of resources managing various aspects of our profitability and have many Key Performance Indicators (KPI’s) to do this, everything from sales per employee, per square metre, per day, per territory, etc. to cost of goods % by product type, manpower cost by % sales, rent as % sales etc. and naturally the businesses break even before and after owners drawings, tax & financing costs etc. These however provide very little information necessary to manage cashflow.
What is equally as important in managing a businesses health is the management of cashflow. This is achieved via management of the Balance Sheet and the KPI’s of its components.
So, what are the roles of the Profit & Loss Statement & the Balance Sheet? How should these help us to look after our Cashflow? The P&L is for a period of time, say for the “year ended 30 June 2007” and as such is a summary of the financial performance whereas the Balance Sheet is a snapshot of the financial health of the business at a particular date which is normally at the end of the P&L period, “as at 30th June 2007”. Therefore the Balance Sheet summarises the result of the P&L journey for say the last year in terms of what we own (Assets) less what we owe (Liabilities). Hopefully the difference (Equity) is positive.
How do we look after the important elements of our cash flow?
The 1st step is obviously to make a profit on an ongoing basis, but equally as important is to manage the key components of the Balance Sheet, these being:
- Trade Debtors
- Inventory
- Work in Progress
- Trade Creditors
- Tax Liabilities
- Credit Cards
- Fixed Assets
- Loans
- Solvency
- Budgeting
Brian Mayoh is a partner in the accounting services practice of Hill Mayoh which specialises in providing accounting, tax and business advisory services to the franchise sector, the practice having numerous franchisees & franchisors as clients.
18.09.2008
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