One of the most important things about small business accounting is understanding the difference between cash flow and profit. Most business owners start the company with the goal of making a profit, but what they don’t realise is that cash flow is what keeps the wheels in motion. In this blog post we explore the differences of the two, and review strategies on how to increase both.
But first, what is profit?
Briefly, profit is a financial gain – it is the money a business makes after accounting for all expenses.
What is cash flow?
Cash flow is the money that is moving in and out of your business at any given time – coming in from customers who are buying your products or services; and going out of your business in the form of payments for expenses. Cash flow is positive when you have more money moving into the business than you have moving out at any given time, and negative when there is more money going out than coming in. Lack of cash is one of the biggest reasons small businesses fail.
How to increase profit and cash flow, and ensure that your business is growing in a sustainable way?
1. Sales – Profit increases when you increase sales; cash increases when you collect the money from customers. Few ideas how to increase both your profit and cash from sales:
- Delight your customers
- Generate more leads and referrals
- Convert a higher number of quotes or proposals
- Increase transaction frequency
- Increase transaction value
2. Invoicing
– Profit increases when you send an invoice to a customer; cash increases when you collect the invoiced amount. To increase both your profit and cash:
- Set clear Terms of Conditions
- Offer a small discount for early payment
- Agree the price in advance
- Stick to your payment terms
- Don’t do work for people who have overdue payments
3. Margins –
Increasing your margins will increase your profit; collecting the increased margin will increase your cash. Here are few strategies on how increase both your profit and cash:
- Increase your prices
- Invoice faster
- Negotiate better payment terms with suppliers
- Reduce errors and rework
- Train and empower your team
- Increase your efficiency
4. Financing
– Reduce your finance costs to increase your profit; borrow money for assets to increase your cash. To increase your profit and cash through financing:
- Spread the costs of assets over 3-5 years instead of buying them outright (e.g. vehicles)
- Borrow from a bank instead of a finance company
- Secure the asset purchases over ‘bricks and mortar’ (if possible)
5. Overheads
– Reducing your overheads will increase both your profit and cash. And few ideas how to reduce your overheads:
- Negotiate with suppliers
- Measure your return on your spend (e.g. advertising, accounting fees, etc.)
- Review your subscriptions
- Go paperless
This is by all means not an exhaustive list of ways to increase your profit and cash, just few suggestions. Talk to our team today and let us help you identify specific areas of improvement in your business to increase both profit and cash.