What’s Most Important Profit or Cash

It’s always good to know you are making a healthy profit. Regular positive profit and loss reports can give you confidence that your business is developing well. But profitable companies have been known to have cash flow problems and even to go under because of them.

If you are a regular reader of these pages, you’ll have seen plenty of articles here about cash flow before. As experienced bookkeepers, we know just how important it is to keep on top of your cash, and we can’t stress this often enough.

A Hypothetical Cash Flow Problem

Suppose you received a new large order for multiples of a product and had to take on extra staff and buy in extra materials to fulfil it. All your efforts go into getting it right and producing what is wanted on time. If you are a service company, rather than sourcing more materials, you might have to pull in people from other jobs to form the perfect team for the new client.

You lose focus on your regular customers, the rest of your order book, and on what’s happening to your cash. Suddenly you hear from your bank that you’ve reached the limit of your overdraft. How long will it be before you can expect to be paid for the new work on which you have been spending most of your resources? How are you going to pay your staff and your suppliers?

The hypothetical example above shows how easily, and quickly, it could be to fall by the wayside if you don’t look after your cash. It doesn’t matter how much profit you’ve made on paper if you don’t have the cash to go forward.

Keep Your Eye on the Bigger Picture

Make time for regular meetings with your bookkeeping staff or outsourced service providers. The latter can help you to look at the implications of the reports they produce for you. Do you need to be chasing up debtors or cutting costs in other areas?

They could also demonstrate trends such as dwindling repeat orders from long term customers. Then you can look at your customer service, see if there have been any problems and try to put them right. Or you can look for shifts in the market where you need to adjust your strategy. Perhaps there are new products out there that are outshining yours, either because of genuine improvements or clever marketing tactics. Your business will need to respond and remain dynamic to continue to make a profit and develop.

Regular Bulletins

Sign up to our regular Office Assistants newsletter and get special offers and discounts.

Sign up

Investors in PeopleThe Institute of Certified Bookkeepers

Company's Practice Number: 4635

This website uses cookies as outlined in the cookies policy