In today’s dynamic business environment, it’s never been more important for trade business owners to understand the ins and outs of their finances.
1. The common cash flow mistake
One of the most common mistakes trade business owners make when trying to improve their cash flow is only accounting for what’s on their profit and loss statement. When someone does this, they’re failing to realise that profit and cash are not the same things.
As the saying goes, “Revenue is vanity, profit is sanity, cash is reality”.
The profit and loss statement doesn’t tell you anything about cash — it’s simply an indication of the profit that comes as a result of the business's sales and expenses. But there’s a lot more to cash flow than that.
Cash flow concerns:
Assets purchased
Money owed
Payment schedules
Work in progress
Director loans
Other considerations with real dollar costs.
So, if you’re running a trade business based on the profit and loss statement alone, then what you’re seeing on paper may not reflect what’s actually happening in regard to your business' finances.
2. Understanding the balance sheet
Understanding the balance sheet can be a challenge, but you still need to understand it. If you can comprehend the balance sheet in tandem with your profit and loss statement, then you’re away — you’ll have no problem uncovering your cash flow.
3.Improve cash flow & keep more profit
Flooding your business with more cash and keeping more profit comes down to two things: increasing profit & decreasing working capital. This is done through 7 key levers in your business:
To increase profitability, we look at:
Price
Volume
Cost of goods sold (COGS)
Overheads (found on the profit and loss statement)
To decrease working capital, we discuss:
Accounts receivable days
WIP or stock days
Accounts payable days (All found on the balance sheet).
We can support you to improve your cashflow.