It is essential to understand that both the Profits of your business and its cash flows are equally important. Only when they are properly managed can the company be successful.

For a business to be successful, it is vital to monitor both closely. If you are starting your business, you must understand these two concepts.

What is cash flow?

This term refers to all the money that “flows” to and from your business. That is all the money that customers spend when consuming your product or service. And it also includes all the money your company pays to function (rent, materials, payroll, advertising, etc.).

Cash flow over a period can be positive or negative. If it is negative, you are using more money than you are receiving over that particular period. To have a positive flow, you must be receiving more money than you spend on day-to-day operations. It is a simple concept. However, it is not so easy to achieve, especially at the beginning.

What are Profits?

Profits are the net income of a business. They are generally calculated as follows: All revenue (sales) minus operating costs and taxes.

Difference between cash flow and Profits.

Having cash at the bank and making a profit is not the same thing, although, to some extent, the two are related. Even a profitable business experiennce cash flow problems, whilst companies that are not profitable may temporarily have surplus cash in the bank.

Managing for profit

Profitability comes from two key elements

1. Ensuring that your business is earning the correct gross profit on the sale of its products or services after deducting its direct costs
2. Controlling levels of overheads expenses

Managing the cash

Good cash flow is achieved by managing cash resources effectively. It involves

1. Ensuring the business is running profitably – See above.
2. Effective control of debtors – ensuring that you receive payments on time.
3. Taking available credit on purchases.
4. Correct management and financing of capital projects.
5. Getting proper stocking levels to avoid locking up too much capital in stock.

Small businesses with limited funding shouldn’t just focus on profits; they should focus on cash flow. That is the real monetary resources used to support operations. Why?

Lack of cash flow is one of the main reasons many small businesses fail in the first few years. If you run out of money, you cannot continue operating your business. Simple as that. Thus, when you are starting your business, the most important thing is to do everything possible so that your customers buy your product or service. It is not so important to project how much you could earn in five years, but you should focus on surviving for two years.

A steady cash flow will allow you to invest more in your business and improve your long-term profits.

The cash requirements of a business are very often under-estimated by its managers, but time spent assessing the cash needs of the company will be time well spent

It will:

1. Identify times when cash will be in short supply so that you can plan accordingly.
2. Ensure adequate funds are available for capital projects.
3. Allow decisions to be made on a sound basis leading to greater efficiency and increased profits.

Good cash flow management helps you keep track of how efficient the business is running.

To find out how we can assist you efficiently manage your cash flow through automation, contact us for a free no-commitment consultation.

Which is perfectly possible…in fact, at least double

Really?

Yes, because if yours is like most owner-managed businesses, it’s run as a personal cash generator and lifestyle support scheme. Which is fine, until retirement looms or a divorce or partner dispute arises, or an unexpected offer is to buy it is made.

One of these events will definitely happen to you one day and when it does, will you be in a good place or will you be one of the 250,000 small businesses that closes every year with nothing to show?

‘Be Prepared’

“a Scout must prepare himself by previous thinking out and practising how to act on any accident or emergency so that he is never taken by surprise.”

So said Robert Baden-Powell, founder of the Scout movement and victorious army general.

Because lives depended on it.

Today, it’s Bear Grylls saying it as Chief Scout, and lives still depend on it as his TV exploits show.

And as a business owner, your lifestyle and security depend on you being prepared.

So, how could you make yourself ‘prepared’, without a load of hard work, more cost and going short on personal income?

Well, let’s say your business is worth £50,000 today but could be worth £500,000. And the gap could be closed within 3 years, would a little of that be a fair trade?

Assuming yes (on your behalf) let’s take a look at how big businesses manage to achieve and maintain such high values to see if we can imitate them economically…

The average big business sells for 14x pre-tax profits. Yet I have seen small businesses making £50K pa close down for only £50K instead of selling as a going concern for £500K+

If you were buying a business, you would look carefully at everything before deciding to make an offer and every time you found a shortfall in some aspect you would make a reduction in your offer, because that is something you would have to invest in fixing, post-acquisition.

And if there were a lot of these, you would walk away because of too much expense, hard work and uncertainty.

Which is why I have seen business owners failing to sell such a business, even paying to get rid of it, having so loaded it with problems through 30 years of lifestyling that it had a negative net worth on sale day.

No one would wish to be in such a place, but many are.

So, let’s see what we can learn from the big businesses that have such high values and make their owners rich. 

Here’s what they have in place:

Growth strategies.

Knowing that to stand still is to move backwards, activities that work together in the form of: marketing; customer care; technology investment; people development; financial management.

Such as these:

1. New customer acquisition

Customers leave all the time and don’t just need replacing but adding to. So marketing that brings a stream of new enquiries that convert to orders.

2. Diversification

Exploring new markets and product opportunities ensuring that they aren’t left behind when: new competition arises; buying trends change; distribution costs change; markets restructure; opportunities arise to be exploited early.

3. Customer retention

Nurturing each one, making it hard for them to leave. Never taking them for granted by account managing to stay in touch with their attitudes, perceptions and needs.

4. Product development

Continuously improving the customer experience to: raise usability; needs fulfilment; value perception; pricing. Keeping customers close and securing new ones through referral.

5. Data production & review

Measuring key indicator performance to spot early trends, enabling early corrective action and profitable decision making.

6. People productivity

Managing the workforce as a human capital asset for: high commitment; sustained output; low turnover; retaining vital skills and knowledge within the business.

7. Profits & cashflow

Maximising margins through: smart buying; intelligent pricing; thoughtful cost control; intelligent management of funds.

8. Lifestyle

Developing systems that: automate everything repetitive; enable remote access into all the key areas of the business; managed from afar through a committed team.

9. Exit value

Knowing what the business is worth, who would pay top dollar for it and how to sell it at any time.

The same approach as having your house always in good repair so always saleable at the best price.

Your business should always be more valuable than your house.

 

Sounds impossible, or too much like hard work?

It needn’t be if you imitate these strategies with the practical tricks that we know and pick them off one by one during the next 3 years.

 

Be aware – the cost of not doing these things, in the long run, will be a worthless business and a glum retirement.

Knowledge is power. The more you know the better you’ll succeed.

 

Most of what I have instanced above are easy to implement. And if you can’t or won’t, your economical AI Business Advisor® will do it for you, helped by low-cost apps.

Your first step is for free and takes 15 minutes by…

BOOKING YOUR FREE ASSESSMENT HERE TO LEARN WHAT YOUR BUSINESS IS WORTH.

Another AI Business Advisor® service…

“Solving your business problems quickly and affordably”

“Achieving your personal business ambitions”

I’m struck by how many of the business owners that I meet don’t consider this. And when I raise the subject, they will usually tell me that they are relying on private rental property and a modest pension for their retirement.

They don’t see their business as a saleable asset but as a source of cash flow that will have no value when they stop work.

And so often, when I look at the financial structure of their business, its only assets are the debtor book (some of which isn’t collectable), creditors about the same value as the debtors, some cash in the bank, and equipment and stock which would fetch less than book value if sold off.

So, it’s true, such a business is really not saleable, just something to close down and walk away from, as do 250,000 other UK small businesses owners every year for this very reason.

But most could be sold for a six or seven-figure sum if managed differently. And such an amount would transform the owners’ retirement finances from ‘getting by’ to luxury.

Yet I get strong objections to that proposition such as “this business is all about me, so it isn’t saleable.”
I strongly disagree and put it to you that any and every business is saleable.
How?

Well, it’s instructive to first look at big businesses, which are all about money and ROI to see what they do. Not to be as ruthless as them but to learn for free what you can adapt.

Here is what they do (just in their financial management stream – there are 4 others*):

1. Measure financial performance constantly, comparing each month of this year v the same month last year to understand what’s happening, why it’s happening, and devising corrective action, while there is still time.

2. Manage cash flow to make sure they collect quickly and pay slowly

3. Focus on profits to keep raising income and suppressing costs through sales, pricing and cost control strategies

4. Manage assets to minimise the money tied up in them and ensure that each generates a return. If not, get rid of it. E.g. post-Corona, do they still need an office? Could they outsource manufacture?

5. Funding working capital not by borrowing but by invoice discounting, asset finance or selling shares

6. Budgeting & forecasting to decide where they are going

7. Financial reporting systems that show weekly /monthly early trends for action now

8. Management accounting to view 12 times a year in depth what the annual accounts will look like in time enough
to manage the outcome

9. Finance Acts compliance by getting their accountants to check them over before each year-end

10. Tracking financial ratios to watch the trends that predict how their business will perform if not either
corrected or reinforced

11. Financial planning to ensure that the business sets out with a realistic plan of each year’s performance with
the resources in place to achieve it

12. Financial management by staying on top of the plan and changing direction, strategies, and resources to get
the best available outcome

13. Buying financial support effectively by knowing who best can provide it and the right moment to call them in.

At face value, much or all of this sounds time-consuming and costly, bureaucratic even. And to an extent, it is. But big businesses do these things for the very good reason that it works, knowing that time invested doing all this provides a very good payback and ensures their survival.

And remember, every big business was once a little one whose founders had the foresight to introduce strong financial management at an early stage.

The average big business sells for 14x pre-tax profits. Yet I have seen small businesses making £50K pa close down for £50K instead of selling as a going concern for £500K+.

It may seem that chasing another order or dealing with a customer crisis is a better use of time, but not if it’s all you do. Better financial management would make the orders come in automatically and prevent the customer problem in the first place.

Knowledge is power, and good financial management provides the knowledge that gives you the power to make smart decisions that build a saleable business worth millions.

Most of what I have instanced above are easy to implement. And if you can’t or won’t, your economical AI Business Advisor® will do it for you, helped by low-cost apps.

Your first step is for free and takes 15 minutes by

Booking a free assessment here

to find out how much your business is worth today, what it should be worth, and the actions needed to get it there—all in a comprehensive report tailored just for you.

Another AI Business Advisor® service…
“Solving your business problems quickly and affordably.”
“Achieving your personal business ambitions.”
(*The 5 business streams are Marketing; Operations; Systems; People; Finance)