If I’m making a profit, why don’t I seem to have any cash? By Raelene Rees, Chartered Accountant
This article is contributed by Raelene Rees, Chartered Accountant and one of our Venus Management Team. Does it seem that your business is doing well but you often struggle to pay your bills on time? Do you KNOW your jobs are profitable but can’t figure out why there’s never any money in the bank? In this article, Raelene shares the difference between cash flow and profit and offers up suggestions around how to IMPROVE your cash flow.
As you construct your 60-second intro this time, give some thought to incorporating and sharing with your group one strategy YOU use to keep your cash flow healthy!
As an accountant, I get asked this all the time. I tell clients how much profit they have made and they then ask – ‘Well, WHERE IS IT?!?’
Yes, a lot of profit is taken by owner drawings and taxes, but profit also goes to loan repayments, gets sucked up by increases in stock on hand (needed for resale) and also gets tied up with debtors. Debtors are the customers that don’t necessarily pay you on the 20th of the month, but YOU need to pay YOUR suppliers/creditors, so consequently, your bank balance goes down!
So a business can be profitable but not have good cash flow. This is generally when a business is under-capitalised, meaning you started the business with next to nothing and relied on profits to pay for your setup and it’s been a continual battle ever since. Two simple ways to improve your profitability are to 1. increase your prices, 2. reduce your expenses or (ideally) both!
Here are some additional ideas to improve your cashflow:
- Get stricter with your credit policy. Customers could pay on delivery or within 7 days, not the 20thof the month following
- Decrease stockholding. Just order in what you need. This has the added bonus of avoiding the obsolete stock.
- Sell off unnecessary assets or lease them instead.
- Reduce personal drawings.
- Possibly restructure loans by re-negotiating interest rates and repayment terms.
Good cash flow is crucial to maintaining a healthy business. It is advisable to have a good working relationship with your bank manager and to keep communicating with them. They will expect to see regular financial statements, so get savvy with your accounting software system or, if it’s not your strength, get outside assistance with a bookkeeper and an accountant.
It is imperative that you invoice regularly as this is the basis of your cash coming in. Don’t hold your invoices until the end of the month – get them out as soon as feasible once the work is completed. If you have long-term projects on the go, consider partial invoicing along the way instead of waiting to send that large invoice at the end of the engagement.
Ideally, you will also have a budget so that you are able to anticipate seasonal fluctuations before they happen. For example Sales are likely to decline over Xmas as your business is shut down; however, income tax and GST are both due 15 January, so you need to set aside funds for this! Or, perhaps your business gears up all year for your big summer season where you’ll make the majority of your turnover, so you need to make sure you can fund the overheads during the winter period leading up to this.
Budgets (if constructed thoughtfully) also gauge how your business is tracking and can be used as a measuring stick for growth – for example, if you take on a new staff member, how much more does your turnover need to increase by to break even?
There is very little utility in looking back one time each year on the ‘year that was’, so ensure you’re working with a bookkeeper and an accountant who are able to support you to look FORWARD and PLAN. I’ll leave you with this thought: ‘Revenue is vanity. Profit is sanity. Cash is reality.’
You can learn more about how Raelene helps her clients here: https://www.reesaccounting.co.nz/
Original blog here…
Next Meeting Topic
How do I position myself in the BEST way to obtain a bank loan? By Zebunisso Alimova Mike Pero Mortgages – Franchise Owner – Wellington
In this article, Zebunisso Alimova – a successful mortgage broker in Wellington – offers her best tips and suggestions for putting yourself in the BEST possible position to obtain a loan.
Consider your own financial ‘habits’ and whether you feel confident that your credit history and current shopping habits won’t unexpectedly ‘bite’ you in the future when you approach a lender.
As you construct your 60-second introduction: 1. read through the article in preparation and then 2. help your fellow group members by sharing one tip YOU have for successfully dealing with lenders or one lesson you have learned the hard way.
Many of you reading this article may already have a loan – whether a home loan or a business loan. You may have taken one out just recently since interest rates have been so low, or you may have taken it out quite some time ago, when you were on the first rung of the property ladder or when you established your business. Regardless of what position you are currently in, I’ll attempt to keep this article general enough that you will be able to apply the concepts to your situation when the need arises for you to seek your next bank loan.
So, how can you BEST position yourself to obtain a loan via the bank or any other financial institution? Read on…
Often, the first thing that the bank will look at is your credit history and your ability to service (pay back) the amount you wish to borrow. For that, you need to ensure you are aware of the following:
- Good credit history is made up of paying bills on time, having no late payments on your credit card, not going into ‘unarranged’/unexpected overdraft in your accounts, and not having payments ‘bounce’ back. Ensure you are maintaining good account behaviour and staying on top of your bills and payment.
*TIP: if you get paid fortnightly, set your bills to come out fortnightly, the day AFTER your pay. Often people get stung with late payment or overdraft fees when they don’t pay close enough attention to when their bills come out vs when they get paid their wages/salary etc. If you get paid monthly, then change to a monthly billing system, but ensure once again it’s a day or two AFTER you get paid. Lenders don’t tolerate clients who are not taking responsibility for their account behaviour.
- Watch out for new fancy ways of shopping via layby systems. These days, there are so many hooks to entice people to spend money and to have their products now and pay for them later, that its becoming the norm. However, as innocent buyers bite on that hook and obtain multiple laybys, (known as afterpay, humm, etc), they don’t realise how damaging this could be when you are trying to apply for a loan. As the lender goes back and looks at your history of spending for the last three to six months, they check for these type of activities too! If the behaviour is consistent, they must include those services as part of your monthly expenses. *BEWARE – Often, frequent layby activity can be a deal-breaker, as money put aside for layby shopping is resulting in negative servicing ability for the loan you are trying to apply for. So, the good general advice is to avoid layby facilities if you can, especially if you are getting ready to obtain a loan.
- Prepare your financial reports ahead of time and ensure they portray you in the best light – ie: that you are financially viable. Often clients go to the bank with a set of financials that don’t ‘read’ well for the bank. Their gross income or turnover may look fantastic, but when it comes to their NET income after expenses, it may be next to nothing, as all the gross income gets eaten up by various expenses. Certain expenses the bank will add back, such as home office use, depreciation and interest paid on loans. But if the overall financial picture doesn’t look good and there is very little ‘bottom line’ or net income, the bank is unable to use gross income for your loan application.
*TIP: You may need to take a bit longer to prepare yourself to approach a lender in order to get your finances in order. If you CAN wait in order to increase your chances of being approved, you may want to do so.
- Utilise professionals to help you obtain your loan. As a business owner, you may have a long-term picture in mind of where you are heading financially. But it’s important to sit down and crunch some numbers with a trusted adviser. Banks may have a dedicated business manager that looks after a certain group of clients, or you could approach a financial adviser and build a long term relationship there. They will understand your goals, be able to provide you with some recommendations and, just like you take your car for its WOF every year, financial advisers are there to help you monitor the health of your finances, fine-tune your financial choices and help you navigate back onto the right path when things don’t go to plan.
I hope these basic tips will give you a bit more confidence as you look to obtain your next loan, whether small or large. Keep in mind COVID-19 has changed a lot of things in many sectors, and finance hasn’t been left unaffected either. The best thing you can do for yourself is to get in early, get your ducks in a row and engage the professionals so that you get the outcome you want. But remember to be patient at the same time, as application processing is taking longer than usual. On this note, I will leave you with a parting quote from a famous political activist and screenwriter George Bernard Shaw: ‘Success does not consist in never making mistakes but in never making the same one a second time.’
You can find out more about how Zebunisso can help you here: https://www.mikepero.co.nz/zebunisso-alimova
*SIDE NOTE: Zebunisso also appears to be a time management ninja, so if you struggle with ‘the juggle’ ask her how SHE does it!
Original blog here…
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