As an accountant, one common issue I come across with our clients is the disconnect between making a profit and having enough cash in their business bank account. It can be frustrating and confusing, but it's important to understand that profit and cash flow are not the same things.
Profit is the amount of money your business earns after deducting all business expenses.
On the other hand, cash flow refers to the actual cash that is coming in and going out of your business.
So, if you're making a profit but your business bank account is empty, here are some possible reasons:
Poor cash management: You may be making a profit, but if you're not managing your cash flow properly, your bank account can still be empty. You may be spending more than you're earning (e.g personal drawings from the business) or you may not collecting outstanding Debtors on a timely basis.
Investing in assets: If you've recently invested in assets for your business, such as equipment or inventory, you may have less cash on hand, even though your business is profitable.
Loan repayments: If you have taken out a loan to finance your business, you may have to make regular capital loan repayments, which can reduce the amount of cash you have in your bank account.
Seasonal fluctuations: Depending on the nature of your business, you may experience seasonal fluctuations in cash flow. For example, if you're in the retail industry, you may experience a surge in sales during the holiday season but a lull during other times of the year.
To address this issue, you may want to consider the following:
Review your cash flow: Take a closer look at your cash flow and identify areas where you can improve. For example, you may want to implement better invoicing and payment collection practices or negotiate better payment terms with suppliers.
Create a cash flow budget: Develop a business cash flow budget that takes into account your expenses, expected income, and the timing of your payments. This can help you plan your spending and ensure you have enough cash on hand. Undertake one for yourself personally as well.
Consider financing options: If you need more cash to cover your expenses, you may want to consider financing options such as a line of credit or a business loan. However, be sure to factor in the cost of borrowing when making your decision.
On a monthly basis, put aside a minimum of 30% of your profit for the month in a separate ‘Tax Savings Bank Account’. Make this become a monthly habit and you will never look back again at tax time.
In conclusion, making a profit is important, but it's equally important to manage your cash flow effectively to ensure the financial health of your business. By understanding the difference between profit and cash flow and implementing best practices, you can ensure your business bank account is never empty.