Profit versus Cash

One question we often hear is “I’ve made quite a good profit, where’s it all gone??” Often there’s a misunderstanding in the meaning of net profit and cash profit. Just because the financial statements show a net profit figure, this doesn’t mean this amount is sitting in your bank account. Usually the difference can be explained by:

- Purchases of additional property, plant and equipment (let’s face it – growth sucks cash)

- Loan principal repayments

- Owners drawings

- A change in the value of outstanding Debtors or Creditors

- Changes in stock levels

- Tax payments

In most cases misunderstandings arise where there isn’t a cashflow forecast or budget in place. By working through the exercise of forecasting your cashflow over the coming year you often gain a better understanding of how the cash flows through your business.

Terms of Trade

We are always surprised at how many clients have terms of trade as the 20th of the following month....The question we ask is Why?? Why not 7 day terms? In every business, the sooner you get paid the better.

Pricing

Another concern is how many business owners aren’t reviewing their pricing at regular intervals. The problem is, your costs are constantly going up and if you’re not increasing your prices, then your profit margin is gradually being eaten away.

Our recommendation is to increase your prices by small increments but more often, i.e. 6 monthly. Customers may accept low % increases without a fuss, but if you suddenly increased your prices by 20% they would jump up and down.

If you want help understanding your financials please talk to your usual CT advisor or alternatively contact our office on 09 238 9219.