Profits are the reason most people are in business. They are a measure of a business success, and without them, it would be almost impossible to attract investors, secure finance, or grow the business.
It can’t be stressed enough, however, that to be able to achieve profit, a business must first get the timing of cash used in line with the timing of receiving that cash. Steady cash flow is king.
The profit trap is an easy one to fall into. Here are three reasons why it pays to focus less on the bottom line, and more on keeping tabs on and securing steady cash flow.
- Cash flow can highlight operational issues
When cash flow moves it can pinpoint operational issues. These are different from sales-related issues.For example, when a business has a quiet month from the point of view of revenue it may actually be because clients are neglecting to pay on time. When the same clients eventually decide to pay it may make it appear that revenue is on track when actually the cash flow is simply out of balance.
In a case like this cash flow movements can highlight why systems that ensure more steady payments from clients need to be implemented.
- It becomes easier to manage growth
Growth through expansion, for example, investing in new locations, new staff or R&D can help boost future profits. And it becomes much easier to plan for if you understand your net cash position. It means you are in a much better position to make decisions about growing your business.
Staffing, paying for office space, taking out leases, and even adjusting your business’ structure becomes far easier to administer with a clear understanding of the business’ cash flow.
- Debt becomes easier to handle
The business may be healthy with an estimable profit margin, and the staff may be highly motivated and skilled at their jobs. But without cash at the right time to pay debts, a business can quickly find itself in trouble.
Debt tends to become more expensive when it isn’t paid on time, thanks to late payment fees and costs of overdrafts piling up. It can also cause unnecessary stress for the owner of the business. But with steady cash flow, business managers are able to plan not just for debt repayments but also how much debt to take on.
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