This is a common problem we hear from new and established clients, especially around year end. Pulling up an impressive Profit and Loss can shift into a painful quandary when your bank account doesn’t seem to reflect the same success you see on paper.
So how does this happen and why is this a common phenomenon?
Inadequate Cash Flow Reporting
Cash flow can’t be predicted from a Profit and Loss statement alone. This misperception often results in a lack of available cash in a seemingly “profitable” business. Thus, inadequate cash flow reporting is likely the culprit.
Following are three of the top issues we observe regarding inadequate cash flow reporting, even within well established companies:
Deficient Financial Reporting
Does this mean accounting errors? Usually not. Accounting errors can happen, but surprisingly this is not the most common reason we find for the lack of cash flow. Often Balance Sheet entries such as loan payments, partner payouts and investments into company growth have a dramatic effect on available cash flow and are not reflected on your Profit and Loss report. Nor should they be, which is why separate Cashflow Reports and Projections are the key to understanding your bank accounts. A quick review of your company financials with a professional could permanently solve your mystery and help your leadership team make better decisions about current spending and growth planning in the future.
Typically when we discuss cycle trends, business owners focus on seasonal cycles such as holiday sales for retail stores. Seasonal cycles definitely affect cash flow, but typically a seasonal establishment knows their on and off seasons quite well and has thus anticipated the swing. What can come as a surprise is that many non-retail companies also experience predictable cycles even when they are not a stereotypical “seasonal” business. Gaining a thorough understanding of common income and expense cycles of your business can clarify the reason behind why your company feels strapped for cash. Reviewing the year over year financials graphically can pinpoint these cycles immediately and will help business leaders improve their overall budgeting and planning processes.
Overspending When Cash is Positive
Seems too obvious, right? Nope, this is a major offender. Increasing profits and growth are exciting for any business leader and utilizing the net cash to continue growth is clearly a key strategy of any expanding company. Unfortunately, sometimes decisions are made to expand too quickly or spend cash on large assets for future expansion before taking into consideration the cash flow requirements for this growth. A strategic analysis of current and projected cash flows provides a clear path of when and how spending should take place. Another strategy to reduce cash flow growth risk is to build a proper reserve for servicing future growth. The amount of cash that should be in reserve can be determined by analyzing overall financial projections along with current and projected cash flow cycles.
Cash Flow and Your Business
Cash flow is one of the most important aspects of effectively running and growing any business efficiently and yet it is so commonly misunderstood. Cash flow deficiency is why under capitalization is one of the top reasons that businesses fail. To see if your company can gain more control over its cash flow and potentially find new sources of more profitable income, contact us today for your FREE initial strategy session. We love finding more money for our clients!