Have Profit But No Cash Flow Can't Travel?

INTRODUCTION:

It's just past the end of the financial year and like all successful businesses you decide to get financially well organised and get your year end financial statements and tax returns done early. You go in to see your accountants and they explain you have had a very good year. You think to yourself "Well that's great but why don't we have any cash? "

When you have this interview, it's a great idea to analyse this.

Let me explain....

Reason #1 Debtors are getting out of control

Unless you are watching this religiously and getting the number of average days as part of your monthly financial meeting, debtors could be slipping outside of terms of trade.

Not only is your money tied up but you also have a greater risk of bad debts occurring.

If you have a debtors clerk who is responsible for chasing up the monies, maybe they are not being as diligent as you thought.

Reason #2 You have more stock than you require

Maybe inventory turnover days are extending so that you find out you could be purchasing smarter rather than just on an ad hoc basis.

When was the last time you reviewed how stock was ordered? Can you find a better way to do this so that you aren't holding the stock as long?

Similar to debtors, the longer your stock is tied up the greater the risk of obsolescence.

Reason #3 Private expenditure too high

Sometimes private spending can get out of the ballpark. These will usually not sit in the profit and loss statement but on the balance sheet either as a loan from the business to yourself or as a dividend/drawing which normally is right down the bottom and is not tax deductible unless you show it as a wage and get a PAYG Summary.

Reason #4 Loan Repayments too high

Similar to dividends and drawings, the principal repayments aren't shown on the profit and loss statement but will show a loan reducing on the balance sheet under liabilities.

Review your loan repayment schedule with your accountant or business advisor. While you're at it check to see that the interest rates the banks are charging you are competitive. If you don't ask you won't receive!

CONCLUSION:

Get your accountant Sydney to explain the numbers to you and the movement of cash and its relation to the profit and loss statement. Learning to read a set of financial statements is a skill and over time you will understand why and where there could be a problem with the cash flow of your business and what you need to do to fix it.

This represents then a great opportunity to perform a 3 way budget and as part of your business planning you will able to use the cash flow forecast to plan to not only improve profitability but also cash flow!