Cash flow problems arise because of cash management issues. Excellent cash management would ensure that cash flows are sufficient and at the right timing to fund and sustain a business. A staggering 80% of companies fail because of their inability to manage cash flow properly. Even in a business’s infancy, cash management should be one of the top priorities. It sets up a good foundation for growth and sustainability.
Cash Flow Problems
The cash flow statement comprehensively reports and records all the inflows and outflows, including operational expenses, debt repayments, investment activities, and revenue. Thus, a deep understanding of a business’s cash flow cycle is a must for effective cash management. It is the starting point to better cash management, and it is also the end goal for doing such. A business owner’s goal should be to improve cash flow through intelligent cash management.
One of the most common cash flow problems is not having enough balance between the inflow and the outflow of cash at any given time. If a company’s money is less than how much is required to pay off debts and operational costs, for instance, it would have no choice but to borrow money. In worst-case scenarios, startups that otherwise have a high market position have no choice but to declare bankruptcy just because cash flow problems cripple them.
Ironically, companies poised for growth are those that fall into this trap. These companies have to hire new talent, increase inventory, and invest in new machinery or tools. Without considering cash flow, they would get to a point where instead of making a profit, they would have to first pay for all the additional costs incurred. It can be a vicious debt cycle, one that you wouldn’t want your business to be in.
The starting point for better cash flow is first to ensure that your finances are correctly recorded and reported. With reliable and accurate accounting, you can then make analyses on which to base cash management decisions moving forward.
Cash Management Issues
Big corporations have chief financial officers, and they are the ones responsible for ensuring that cash flow is adequately managed. They devise strategies and make sound decisions based on factors such as economic climate, internal timelines such as payment deadlines and market activity, and the company’s current assets and liabilities.
However, for a small business with a more straightforward cash flow, it should be more than enough that the owner is well aware of how cash moves in and out of the company. As you work with an accounting firm, make sure that you can churn out money that can cover your base expenses such as taxes and mortgage, operational expenses such as salaries and utility bills, and most importantly, profit.
The Profit First Approach
While traditional accounting’s formula is sales — expenses = profit, the Profit First formula reverses this by taking out the profit first, and then whatever is left should be allocated for expenses. While technically speaking, the numbers should be the same; it makes a whole of difference in the way a small business would approach cash management.
Based on the Profit First book by bestselling author Mike Michalowicz, its main principle is turning accounting upside down so that you earn profit no matter what, and then work your way around whatever amount is left for expenses. This is a transformative approach, as it forces you to be more innovative, more mindful of how you handle your business’s day-to-day operations in the most cost-efficient way.
Simple as it may seem, the Profit First method of accounting has a knock-on effect on the overall cash management strategies a company has in place. With such a straightforward and optimistic treatment of profit, it warrants a mindset that furthers a business forward instead of stagnating in a pool of debt and poor cash flow.
If you want to learn more about the discussion of cash flow problems and cash management, you can get in touch with Annette & Co. for FREE business advice. Better yet, you can tune in to my Podcast — Uncover Wealth Radio — where I talk about the latest updates on UK Businesses and also COVID-19 every workday at 11 in the morning. You can also join my exclusive Facebook group that talks about a lot of business matters and UK businesses,
For more information about this matter, be sure to check out Episode 127 of Uncover Wealth Radio. If you’ve missed the LIVE broadcast, you can always revisit the episode here on our website, Annette & Co.