As a small business owner, you're likely wondering how to improve business cash flow and profits.
A business can be profitable but still have cashflow issues.
It is important to implement procedures in your business that will ensure cashflow is appropriately managed.
You know that profit is made from selling your goods or services for a price higher than what it cost to make or deliver to your customers.
Cash of course is generated from these transactions, as well as other activities that the business may undertake (such as selling assets).
The key to a successful business is good profitability and adequate cashflow.
Having strong margins is one way how you can improve business cash flow and profits.
This means, if you manage your margins properly, your trading should always be profitable and hence have positive cashflow, right? Wrong!
A business can be profitable but still encounter cashflow issues.
How does this happen? Well, it’s all about timing.
Profit of a transaction is calculated when the sale is made.
If you are in a business that offers goods or services on credit, then the profit is generally assessed at the time of the sale; however, you may not receive the cash until some time later.
There are two ways the transaction can be recorded: either on the cash basis or accrual basis. Let’s explain.
When working out if your transaction is going to be profitable, these are probably the questions you will need to answer:
- How much will it cost you to buy or make the product, or provide the service (hours paid)?
- What is a realistic price that your customer will be willing to pay?
- What do your competitors charge for the same or similar products or services?
The next step is to compare the price you will receive with the cost paid, and if price is higher than cost, the transaction is profitable.
Managing both your margins and the timing around your transactions is an essential way to improve your business cash flow and profits.