Why Cash Flow May Be More Important Than Profit

If you intend to start your own business to sell products or services, you may have made some projections and have reasonable expectations. Broadly speaking, you know how much it is going to cost you to make these products or services and how much you can charge in the current marketplace. This will give you an idea of the potential that may inspire you to take action. Yet, in between your starting point and your annual summary may lie many complications, and you need to be able to assess your progress carefully as you go. Why is this so important, and what can you do to protect your dream going forward?

Key Differentiation

Firstly, understand that profit is not the same as cash flow, and the larger or more complicated your operation, the greater the importance.

In the Real World

You can certainly analyse your profit on a month-to-month basis as well as annually, but you need to take into account costs that may not be incurred until the following period or expenses that you may have paid in advance. These and other transactions make a cash flow projection critical. Otherwise, you may suddenly come across a crunch point where, for various reasons, you do not have enough money in the bank to pay some bills.

Cash Flow Secrets

Maintain and keep a cash flow report alongside any sales projections. You will always know what your cash position is and will be able to project everything forward so that you can anticipate a potential shortfall. In this way, you can ensure that you have a cash buffer to protect you against any unexpected difficulties. In an ideal world, you should have enough cash in the bank to pay for several months of operating expenses if something happens to your revenue. Recent events have shown why this is so important and how revenue streams can be interrupted by something completely unexpected.

Chasing Revenue

In addition to cash flow reports, make sure that you keep on top of revenues. Try to set up direct debits or other automatic payment facilities so that income is more predictable. If some clients are slow to pay, do not let this slip, but follow up as soon as possible.

Outsourcing the Work

Not everybody is a number cruncher, and you may not have time for all of this detailed work anyway. This is why you should bring in a bookkeeper to help guide you forward. They will establish and maintain your cash flow and report any problems as and when they arise.