If my business is making a profit, where is the cash?
Some small business owners find themselves in the difficult position of running a business that according to reports appears to be profitable, but still having no money in the bank. It’s a really important situation to address, after all, a lack of adequate cash flow is one of the main causes of small business failure.
Here are some reasons profitable businesses have little money in the bank, and what business owners can do to address these situations.
1. Using business money for personal reasons
You may be using your business bank account as a personal bank account, withdrawing the money as you see fit. Of course, you need to earn a living. Instead of using the business account like a personal account, you should budget for your personal expenses and transfer a regular amount from the business account to your personal account at set intervals. If your personal money runs out, you can’t go back to the business account for more money until their next withdrawal date.
Regular use of the business account, even for relatively small amounts, adds up and can have a drastic effect on a business’s cash flow.
2. Not collecting payments
Businesses need to make money, and they do so when customers pay their bills. Not sending out invoices in a timely manner, not following up when customers fail to pay and not conducting adequate credit checks on customers all put cash flow in jeopardy.
It’s best practice to send out invoices with clear payment terms and follow up immediately if customers don’t pay on time. You can also put procedures in place to avoid customers who are unlikely to pay for work done or to mitigate the damage if clients attempt to get away without paying. Requiring deposits, for example, are a great way to manage both cash flow and customers.
3. Not preparing for tax season
Many small business owners see taxes as something they can worry about later. Then tax season rolls around and then they don’t have enough money set aside to pay the the tax due. In some cases, a business may have suddenly had a large profit increase but not increased the amount set aside for taxes.
Business owners must treat their taxes as a regular expense. Set money aside each month to allow for tax. If there is a drastic increase in profits, set aside even more money. Being prepared is far better than being caught with too little.
4. Loans and Hire Purchases
When you pay your business loans and hire purchases, the principal portion of the repayment does not affect the profit and loss report. These payments reduce the actual cash in the business, but not the taxable profit as these sit in the liabilities in the balance sheet. You could very well be paying more on loan payments than any profit made.
There are steps you can take to ensure that their business makes a profit and has money in the bank. First, you should learn how to read and understand their balance sheet and debtors ledger. These show how much money is coming in and where it’s going. It also highlights which customers aren’t paying their bills.
You should also avoid using the business bank account for personal expenses. Instead, pull a set amount of funds to your personal account and limit your personal expenses to that amount.
Finally, you must understand your liabilities. Liabilities affect how much cash is available for their business and even small liabilities add up quickly. Know how much is owed, how much is paid monthly and when those bills are due.
By keeping track of the money coming into your business and where it goes when it leaves, you can get a better handle on ensuring your business not only makes a profit but actually has money in the bank as well.
Cashflow forecasting ensures you are aware of upcoming rises and falls in cashflow and allows you to plan for these. You can download our free cashflow forecast template to help you with this.
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