There’s one sentence clients say, which strikes fear into my heart, and I bet it’s not what you’re expecting!
The sentence is…
“You don’t have to worry about our business – we’re profitable!”
Now, you’d think that would be music to my ears. After all, we’re here to help companies manage their finances really smoothly and maximise their profit. And of course, I want our clients to be profitable! We do everything we can to make that happen.
The problem is, sometimes company owners get the wrong end of the stick. They believe that being profitable means that their company is financially secure, that their future is assured and that they’re “safe”. So, they get a little complacent about their finances and that’s a moment of real danger.
You see, you absolutely can run out of money and go into insolvency, even if you’re profitable. In fact, it can happen quite easily. For example, what would happen if 3 of your largest clients suddenly ran into trouble, and delayed payment by 6-7 weeks? In the current unstable economic environment, with rising inflation, interest rates and taxes, it’s not even such an outlandish scenario!
You might still be very profitable on paper, because they’ve commissioned the work. But if the money doesn’t make it to your bank account for weeks on end, you might find yourself unable to meet payroll or rent.
Here’s another common scenario. You’re growing really fast, bringing on lots of clients – each of whom is wildly profitable. To serve them all, you have to buy some expensive new machinery and expand your team. That money will leave your account on August 1, but your brand-new clients have 60 days to pay you. You won’t see money from them until mid-September at the earliest. That’s a big gap. If you don’t have reserves, you could easily be caught short while you’re waiting for your influx of cash.
Don’t think it couldn’t happen to you! It can happen even to a company as big as Lehman Brothers. In July 2007, they proudly announced that their profit was up 27%. Just over a year later, in September 2008, Lehman famously crashed.
So how do you stop this happening to your business?
Chances are, you probably pay a lot of attention to your profit-and-loss statements.
But you need to pay equal attention to your cash flow.
That means understanding how much money is in your business account today, and how much you expect to be there next week, next month and next quarter. Keeping an eagle eye on your accounts, so you know on any given day whether your balance is what you expected. And adjusting your forecasts immediately if things change.
This won’t stop you running out of money. But with a good cash flow forecast, you’ll have plenty of notice if there’s trouble up ahead. And you can use that time to take decisive action.
Think of your cash flow forecast as your early warning system. It could easily save your company.
That’s why cash flow forecasts are standard in every good finance department.
And it’s why you need one, too.
If that’s something you’d like help with, get in touch with us today.
Simply complete this form and one of our team will get back to you, or call us now on 01730 719 250.
If you would like a cash flow template, please send us an email to email@example.com and we will email one over to you!
We help businesses like yours manage your cash efficiently, so you can grow faster and maximise your profitability. And most importantly – never run out of cash!