Without cash, wages won’t get paid, suppliers won’t supply and your business won’t run. For a small business, cash is king.
Managing cash flow
On a day to day basis, small businesses should be managed according to cash flow and not the P&L. I’ve been into so many businesses that are profitable on paper, but have no money in the bank and are therefore struggling to operate.
Using a cash flow statement will tell you exactly where you’re spending your money, unlike a P&L. If you increase customer credit for example, this affects cash flow, but wouldn’t show up on a P&L. Likewise, buying equipment will impact short term cash flow (as shown on the statement) but may not affect overall profitably on the P&L.
Another benefit of using cash as the business driver is that you can use the knowledge to create even more! Understanding where you’re spending can help you cut costs. Likewise understanding where your money is generated can help you increase activity in that area to make more sales. Again, looking at the P&L won’t highlight these opportunities.
So the benefit of concentrating on cash flow is clear, but how? Simple bookkeeping software like Quickbooks or Xero allows you to track money in and out, as well as providing cash flow reporting. You can even link them to your bank accounts to make life easier.
Your accountant will be able to advise you on a good solution for your business and likely show you how to use it to your advantage.
Read on to my next blog to discover more effective ways to manage your cash flow.
If you’d like help to implement any of my advice, why not contact me to arrange a Free Business Review? This is a genuinely free 2 hour session whereby I’ll come into the business and spend two hours giving you advice to make positive changes. Click here to arrange yours now.