3 Reasons Why Profitable Businesses
Struggle with Cash
It seems counterintuitive, but it is something that can really catch out a business.
How can a business which on paper should be in profit suddenly struggle…or even go bankrupt?
The answer is usually cashflow!
Running a business is often a delicate balance – having enough money coming in to afford what needs to go out.
There are often lots of variables and factors which lead to struggles, but here are three of the most common to be aware of. Let’s explore these in turn, so that you can be prepared.
1. HIGH LEVELS OF STOCK
Most businesses need some amount of stock, especially in the retail, hospitality and entertainment sectors. The amount needed and the types depends on the business.
What often happens is, as business is growing, business owners will decide they need to hold more stock to keep up with demand. What is crucial here is getting the correct level of stock.
Too little and you won’t be able to meet the demand, you may disappoint customers and you’re missing out on sales, i.e. cash.
Too much and you risk stock remaining unsold, getting damaged or, for consumables, going out of date. Importantly, your cash is now invested in the stock sitting on the shelves or being thrown away, instead of in your bank account.
As an accountant, I have been asked before whether a business owner should pay a chunk of money into a personal pension or to buy more stock, just before year end, in order to pay less tax. My answer is always the same (no matter the time of year!): “only buy the stock you really need and pay into the pension, if you can actually afford it!”
Buying excessive stock is not an effective tool to reduce your tax bill. The tax saving hardly ever outweighs the cashflow difficulties and lost opportunities too much stock can cause. You are more likely to lose money than save it.
2. OUT OF SYNC PAYMENT TERMS FOR PURCHASES AND SALES
If you are allowing your customers to pay you in 30 days, but your suppliers are requesting payment in 14 days – you will have cashflow issues.
When determining payment terms (both for your customers and the suppliers you use), you must think about cashflow.
Obviously, suppliers will have their own payment terms. However, research and communication is key here.
If you have a trusted supplier, then it may not be worth questioning their terms. However, if you feel you buy from them regularly and you have built a good relationship, it may be worth a polite conversation. There is no harm in asking.
When looking for new suppliers, it is important to remember that payment terms are worth comparing, as much as payment prices.
Also, be clear with your own customers and make your expectations known. Ensure they are clear about your payment terms. If you do offer 30 day terms, consider if reducing this would damage relationships or not. If it will help your cash flow, then it may be worth considering. Furthermore, make sure it is easy to pay you! There are lots of automated options and payment formats that you can utilise.
Get in touch to learn more.
3. WITHDRAWING TOO MUCH CASH FROM THE BUSINESS
CASH, TAX AND VAT PAYMENTS
Evaluating the three areas above on a continued basis is so important for identifying cashflow issues before they happen.
One last area to mention is the problematic times around VAT payment deadlines where businesses fail to save for these payments, and also other tax payment deadlines, where the issue is exactly the same.
Not having enough cash to pay the VAT and tax bills often happens when business owners don’t have up-to-date figures and good accounting software. It happens because they don’t know what to expect their payment amounts of VAT and tax will be, far enough in advance of the deadline.
Once again, knowing your numbers and keeping your records up-to-date and accurate ensures we can both estimate the amounts and put in a good saving plan, in advance. This ensures you have enough cash coming in, plus the cash saved and ready, for when it needs to go out to cover these significant payments.
GET SUPPORT WITH YOUR CASHFLOW
The reasons sound obvious. The solutions sound simple. But, we all need a guiding hand sometimes.
Let’s make sure cashflow doesn’t become an issue for your profitable business. Work with me!
While this blog aims to provide helpful information, it’s important to remember that every business and person is unique. So, before making any decisions, we highly recommend seeking professional advice. We want to ensure that you have all the support you need to make the best choices for your situation!
