You might think that being profitable and broke is a paradox. If you are making money, it must be impossible to have none of it, right?
While this might not seem immediately logical, SMEs can be simultaneously profitable and without the liquid funds to pay bills or meet obligations.
As SMEs are often the most exposed to cash flow crises, keeping cash flow in check should be a top priority, particularly if a business is just starting out.
Healthy profits ≠ healthy finances
While profit can be a great measure to see if a business model is functioning as intended, it does not provide a complete picture by itself.
For example, imagine a company called John Doe Distribution invoiced £30,000 for a project in August and is due to be paid in December.
Looking solely through the lens of profit, this company has just landed a contract that will eventually lead to a £30,000 payday.
However, John Doe Distribution now has four months of payroll, rent and project delivery costs that must be paid before the money touches the account.
Now scale up this problem and apply it to several different concurrent clients, all with their own project costs. John Doe Distribution is no longer ‘quids in.’ Instead, it could be on the brink of insolvency.
Cash (flow) is king
This is where cash flow comes into play.
Cash flow focuses on the flow of money in and out of the business bank account to evaluate whether there is enough liquidity to cover wages, supplier costs and tax liabilities.
If the balance sheet is negative and these obligations can’t be met, then the profitability of a business becomes an afterthought.
For smaller businesses, maintaining profitability while having a positive cash flow can be tricky.
This is because a lot of cash flow problems faced are not necessarily the fault of the business, as they might take the form of late-paying customers, rising industry costs or bookkeeping errors.
SMEs typically have thinner cash reserves and proportionately higher operating costs, so cash flow crises can hit them disproportionately harder.
Moreover, it is not uncommon for owners of smaller businesses to act as guarantors or collateral on loans or leases, making poor cash flow a personal problem.
General principles for a healthy cash flow
Now we’ve established how important cash flow is, here are some strategies to ensure your business can stay afloat:
Talking to a cash flow specialist
Cash flow management is essential for SMEs and often a better immediate indicator of business success than profit.
Understanding that a poor month of profit is outweighed by a poor month of cash flow is crucial, allowing businesses to realign priorities.
Hiring an accountant for your company can provide services that improve cash flow and protect against any risks to personal finances.
While smaller operations may not have the resources to take on an accountant full-time, outsourcing gives the benefits without the additional costs.
Our financial experts can help
If you find your business struggling to stay on top of cash flow, or you think you could benefit from better financial planning, you should speak to an accountant.
We offer a range of services to ensure you are prepared and aren’t caught in the lurch by cash squeezes and unexpected costs.
Whether it is creating a cash flow forecast or a detailed tax plan, we have got you covered.
Is your business struggling to meet liabilities? Book a consultation with a member of our friendly team.
