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Cashflow – do not think you are richer than you are!

In businesses where you get paid upfront you have to be so careful to remember that costs and cash outflows will follow the cash inflows – so do not spend all the money!

Surely upfront payments are cashflow paradise?

Ask the majority of businesses that sell on credit whether they would love to get paid upfront and of course they will all say yes.

Positive cashflow, less time and money spent on chasing debtors, very low risk of bad debts – what’s not to like?

But too many businesses fail to manage this position well enough and can fail as a result.

Do not think you are richer than you are

Let’s say you have a property refurbishment business and you insist on being paid steadily throughout the duration of a project. Obviously a sensible way to run your business.

But the danger is that you take too much of the money out of your business and forget that there will be costs from suppliers to be paid, VAT, tax on the profits etc.

Even worse, you might take your eye off the ball regarding costs and let them over-run. In this case your profit margin has gone and there is even more money due to leave your business. After you have already spent a lot of it!

It’s all too easy to think you are richer than you are and spend money that should be earmarked for other purposes.

What is the answer?

There are two sensible things you can do:

  1. Ensure you recognise in your management accounts all of the costs related to the revenues you have invoiced
  2. Have a separate bank account where you keep money that you know has to be paid out – to suppliers, HMRC etc

The second bank account is incredibly useful because inevitably it means there is less money in the main bank account and this is a great indicator of how profitable your business really is.

 

Cashflow is so important – we all know that.

But even where businesses get themselves into a very strong position through upfront payments from customers we still see too many fail to manage this position of strength and struggle when they should not.

 

Michael
@diaryofanomb
Sales | Margins | Profit | Cashflow