⬇️Know the difference between profit and cash flow⬇️
You may have a profitable business, but it can still feel like you don’t have any money?
You can become cash strapped by having all of the businesses money tied-up in assets, leaving you unable to pay your expenses.
The problem with not keeping a close eye on this with something like Xero is that you can end up with very little cash flow, even though your business may be making solid profits. You can only stay afloat using loans, credit cards and lines of credit for so long.
In order to avoid this situation, it’s important to understand the difference between profit and cash flow. Simply, your profit is what you’ll be taxed on at the end of the financial year, whereas your cash flow is what’s actually in your bank (money in the bank) as money comes in and goes out of your business.
Debtors – the people that owe you money. When you invoice a debtor you add revenue to your business and therefore profit. Until they pay you for the service, you don’t add the cash to your business. This is why managing your debtors is so important to the cashflow of your business.
It can be very common for any business owner to make a profit but have issues with cash flow.
Keep track of what you’re spending and selling.
You might have bought too much stock, re-paid debt, drawn out too much money(this is very common), or paid cash for assets that depreciate.
Take a thorough look at your books before committing to expansion plans that could put your business at excessive risk of a lack of cashflow.
Being able to read a balance sheet (the financial statement that tracks your cash movements) is a very good skill for a business owner and one of Phil’s favourite things to teach to empower a business owner.
Hopefully that helps 😃
Any questions, you know how to find us!