There is a saying that goes,
Turnover is vanity
Profit is sanity
Cashflow is reality
Over a period of time it’s true that a business will often close due to a lack of profit. In our experience however poor cashflow is a more likely cause of failure in the initial start up years.
Cashflow is a term often used in business but what does it mean exactly? Cashflow in a business refers to the monetary day to day incomings and outgoings. It isn’t just about issuing an invoice and receiving payment. It is about ensuring the cash is received in time to cover any outgoings the business has to meet.Cashflow is a balancing act.
And for this reason it’s important to have contingency plans, such as a bank overdraft, in place in anticipation of any gaps in cashflow.
It’s good practice to consult an accountant from day one to ensure that you set good and healthy margins in your business.It is also important to understand profit and know what your business break even figure is.
If you don’t manage your cashflow, your business may have to close and if you are a sole trader you will usually be personally liable for any business debts.
The good news is that managing your cashflow doesn’t have to be complicated. Look out for the warning signs such as continuously being chased by suppliers for payment or always hitting your overdraft or credit limits, these could be the early signs there is a problem that needs tackling.
Ensure that you seek professional advice sooner rather than later; if you have cashflow issues face them. A good accountant will be practical yet sympathetic and will be able to support you with the best solution.