If my business is making a profit, where is the cash?

Running a small business often means you have to juggle a dozen tasks at once, and sometimes, even profitable business owners find themselves strapped for cash. It's crucial to address this, as inadequate cash flow is a leading cause of business failures. Here’s a breakdown of why this happens and what you can do about it.

1. Blurring the Lines Between Business and Personal Finances

It’s tempting to dip into the business funds for personal expenses, especially when things are tight. However, treating your business account like a personal one can quickly drain your resources. To avoid this, set a fixed salary for yourself, transferring it from your business account to your personal account at regular intervals. Once it’s gone, resist the urge to withdraw more until the next scheduled payment. This discipline can significantly stabilise your cash flow.

2. Not Collecting Payments Quickly

Your business thrives when payments are prompt. Delays in sending invoices, lax follow-ups on unpaid bills, or insufficient credit checks on new clients can wreak havoc on your cash reserves. Develop a robust invoicing system with clear terms and conditions. Follow up diligently on outstanding payments. Implement strategies like requiring deposits to ensure steady cash flow. These steps can safeguard your business against unpaid services.

3. Overlooking Tax Preparations

Taxes tend to be an afterthought for many small business owners, leading to last-minute scrambles during tax season. This often results in insufficient funds to cover tax liabilities. Treat taxes like any other recurring expense. Allocate funds monthly and adjust the amount if your profits surge unexpectedly. This foresight will prevent tax season surprises and ensure you’re always prepared.

4. Debt erosion

Debt repayments can significantly impact a business's cash flow, especially for those with substantial levels of debt. Even if your business is making a profit, the cash isn't always readily available because a chunk of it is allocated to servicing debt. These repayments come directly from your profits, reducing the amount of cash left to reinvest in the business or cover other expenses. This is why even profitable businesses might find themselves in a cash crunch. To manage debt effectively and maintain healthy cash flow, it's essential to create a debt repayment schedule that aligns with your cash flow cycles. Consider negotiating terms with creditors for more manageable payments and explore refinancing options that might offer lower interest rates. Regularly monitoring your debt levels and integrating debt management into your financial planning can help ensure that debt doesn't erode your cash reserves, allowing your business to remain financially stable. If navigating debt feels overwhelming, Affinity Accounting's team in Wellington is here to offer tailored advice and strategies to keep your business on track.

Final Thoughts

To keep your business not only profitable but cash-positive, familiarise yourself with your balance sheet and debtors ledger. These tools provide insights into your financial inflows and outflows, highlighting unpaid customer bills. Contact us for guidance on this

Separating personal expenses from business finances is crucial. Stick to a predetermined salary and manage your lifestyle within those boundaries.

Finally, have a clear understanding of your business liabilities. Regularly review what you owe, the monthly payments, and due dates to maintain a firm grasp on your cash flow.

Keeping track of these elements will empower you to ensure your business is financially healthy. If you have questions or need assistance, Affinity Accounting’s team in Wellington are here to help. Let’s chat about how we can support your business journey

Contact us for advice specific to your situation.

Affinity Accounting is a team of Wellington Accountants who love to help small businesses realise their potential.

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