Many businesses get confused between turnover, profit and cash. And worse still, this sort of confusion can lead to mistakes and bad business decisions.
The key difference is easy to outline, but it can be difficult to understand sometimes why you have less (or more) cash than you expect. And it is vital to be able to predict how much cash you’ll have and when (cashflow forecast).
Profit is an easy one. Turnover (sales) less costs. This indicates how much the company is making in a given period and if that company is in profit or loss.
Cashflow is different. This is about what cash is coming in (when invoices are paid) and what cash is flowing out (when expenses are paid).
Many companies will do a lot of predicting and budgeting around their profit and loss. However, they’ll forget to factor in their cash position in those predictions.
If you run out of cash and you’re unable to borrow, your business isn’t viable. So, knowing your cash position and how to manage your cashflow is vital. This applies to projects too.
It is all very well planning for a profitable project, but if that project requires a significant amount of cash at the start and you don’t have that cash, it is pointless. Knowing your cashflow allows you to plan and predict more accurately than just looking at profit and loss.
The good news is, cashflow is easy to stay on top of. Our clients use online bookkeeping software and all of the leading packages have apps and plugins for cashflow. These applications can look at your historical cashflow and predict your future cashflow. Some of them allow you to input projects and large expenditure too so they can account for those.
Once you’re on top of your cashflow and what you owe and when, you can really start to plan for your business. Whether that be cash required for a new project, an acquisition or asset expenditure, everything is in front of you to be able to make informed decisions.
If you want to talk about your business, book a Discovery Meeting here. We can help you work out what steps you need to put in place to get on top of your cashflow.