Is This The Most Important Short-term Measure For Your Business?
It’s an obvious statement that a company can only stay in business if it is profitable over the long run and so every business aims to increase the amount of money it makes each year. But there is another figure which is even more important to the short-term success and survival of your business. An Auckland accountant explains the most important measure in your business.
That is the amount of cash you have on hand.
In fact it is not a lack of profit but a lack of cash that is the biggest cause of business failure.
It is possible for a loss-making company to stay in business if has enough cash-flow to pays its bills although without a financial surplus eventually the cash will finally run out. But it is also true, and quite common, for profitable firms to go out of business simply because they did not have enough cash to pay their creditors.
Why is cash so important?
Simply, your business will grind to a halt. Cash is the oil that keeps your company lubricated. Imagine how long your staff would stay if they didn’t get paid.
- Or how can you fund a marketing campaign without cash to pay advertising companies.
- Or how can you get a website without cash to pay your Internet marketing people.
- Will your suppliers keep extending credit to you if they are not getting paid?
- And do not forget the tax office. The tax department shows very little leniency with late tax payers. In the beginning they apply late payment fees but over time they will bankrupt you or your business for non payment of taxes.
Without good cash-flow and surplus cash on hand, you will very quickly go out of business, even if you are making a profit. An Auckland accountant will be able to explain this to you.
How can a profitable business go broke?
Many business owners are surprised that even though they are making a profit their business goes bust. How can this happen?
Imagine you receive a big new order. To fulfil that you will need to buy more materials but perhaps your supplier feels nervous about giving you a lot of extra credit. So you pay in advance for the extra materials. You will likely have given credit to your customer so you will not be paid for 30 days. In the meantime you have to pay your staff and other bills but you have also paid for the extra materials and then you realise you do not have enough cash.
So even though you have a profitable new order, your business can go broke because you do not have the cash-flow to pay your bills.
How can you manage your cash-flow?
Possibly the most valuable document in your business is your cash-flow forecast statement.
This will provide you with a forecast of how much cash you will have at future points in time. This will match the payment dates for both your revenue with your expenses so you can see a net cash position. If you need help with this an Auckland accountant will be able to assist.
By forecasting your cash-flow you can see if you may have a potential squeeze in future so you can talk to suppliers or your bank well in advance so no-one has any nasty surprises.
If you haven’t done a cash-flow forecast before, talk to your accountant in Auckland who will be able to help you.