Why Profitable Businesses Can Still Have Cash Flow Problems
You can be making a profit and still worry about money. It sounds odd, but it's something that catches a lot of business owners out.
You might look at your accounts and see a healthy profit, but then a big tax bill arrives, a customer hasn't paid yet, wages are due and suddenly you're checking the bank balance more often than you'd like. So what's going on?
Profit isn't the same as money in the bank
Profit is what's left after your income and expenses have been accounted for. Cash flow is about when money actually comes into and leaves your business, so timing matters.
Imagine you've invoiced a customer £20,000. That £20,000 might be included in your figures, but if the customer doesn't pay for another 60 days, you don't have that money available today.
Meanwhile:
Your staff still need paying
Your suppliers still need paying
Your tax bill still needs paying
That's where a profitable business can find itself under pressure.
Growth can potentially make the problem worse
You might assume that more business automatically means more cash, but is not necessarily the case.
Taking on more work can mean buying more stock, employing more people, increasing overheads or spending money before you've been paid by your customers. You can end up putting more money into the business before the additional income actually reaches your bank account.
That's one reason why cash flow becomes increasingly important as a business grows.
Cash Flow Forecasting gives you a clearer picture of what your cash position could look like in the months ahead, rather than finding out when the money has already disappeared.
Tax bills shouldn't come as a surprise
Tax is another big one. It's very easy to look at the money currently sitting in your business bank account and think you've got more available than you actually do.
If some of that money is going to HMRC, it isn't really available to spend.
Knowing roughly what your future tax position looks like can make a big difference. It means you can plan for the payment rather than suddenly finding yourself trying to find the money when the bill arrives.
So what can you do about it?
The first step is understanding what's happening.
Look at when money is expected to come in.
Look at when your regular bills, wages, tax and other costs need to go out.
Then think about what happens if something changes.
What if a major customer pays late?
What if you take on another employee?
What if sales increase by 10%?
What if you need to make a large investment in the business?
This is where cash flow forecasting can be useful. It gives you a clearer picture of what your cash position could look like in the months ahead, as opposed to finding out when the money has already disappeared.
You don't have to wait for a cash flow problem
Cash flow planning isn't just for businesses that are already struggling. In fact, it's often more useful when things are going well.
If you're considering growing the business, taking on staff, buying equipment or making a significant investment, understanding the likely impact on your cash can help you make the decision with your eyes open.
That's where we think your accountant should add value. At Culverhouse & Co, we want to help you understand what's happening in your business now and what could happen next. Being profitable is important, but so is knowing whether you can actually afford your next move.
If you're not sure what your cash position could look like over the next few months, it's worth having a conversation with your accountant.
Curious to see how we can help, or answer any cash flow problems? We offer a completely free, no-obligation conversation!
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