Cashflow and your Business
You’ve been trading for several months now and your income statement is showing that you are making a profit, nothing spectacular, just nice profits. While you feel good when you see this, it always bothers you that you never seem to have any money at the end of each month.
How is it possible, you wonder, that you are making profits but do not to have any money in the bank?
What you are experiencing is the effects of cashflow, in this case unfortunately, negative cashflow.
What are the circumstances that cause Cashflow to be a problem?
Rapid or Unplanned Expansion
Very often businesses that are going through continuous expansion find that they will experience cashflow issues due to more and more of their money being tied up to pay for the expansion (more stock, new staff, more desks, etc.).
Many Start ups often find themselves facing this issue. Due to inexperience, they have calculated a profit margin that does not allow them any room to manoeuvre when sales slow down, so find out they do not earn enough to cover their operating costs.
Slow or Non Paying Debtors
The biggest cause of poor cashflows are slow or non paying customers! All too often small businesses give very generous payment terms (and don’t check credit histories) to secure work and then find themselves scrambling to pay the bills when they realise the client is not going to pay or is going to pay in instalments.
Unproductive staff are just as bad as slow or non paying debtors! Every time your staff miss a production deadline or need to redo their work because of sloppy workmanship, it is negatively affecting your cashflow. Regardless of the quality of their work, your staff are still expecting to get paid each month, even if you have not earned an income yet.
The above are examples of the most obvious causes of poor cashflow, there are many more, but get a grip on these and you will see your bank balance grow. Soon we’ll have a look at what things to consider when bringing on a partner.
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We are your “one stop SME shop”, assisting with everything from Accounting, Business Management, BEE, Consulting, Company Registration to Payroll and Mentoring.
For more information, please visit our website www.sme.tax or give us a call on 087 238 4357