While profits are certainly nice and ultimately, are what you’ll be able to reinvest back into the business to help grow, they shouldn’t be your first priority when trying to gauge how your business is performing.
Emphasizing on profits alone will present an inaccurate picture of how your business is actually performing. Your accountant wouldn’t just look at your P&L statement now, would they? You would want to examine your cash statement, balance sheet, and other relevant metrics in addition to your profits and losses.
And as a “heads up”, did you know you can still be “profitable” while experiencing slow/negative cash flow?
That’s right. Say you’ve sent out 10 invoices for $100 each, based on work you did amounting to $50 per job. You’ve made a profit of $500. Alas, until your customers pay those invoices, you’re cash negative by $500 — the amount you invested in those jobs.
Reading a snapshot of your cash statement would tell you this information upfront. So, by focusing on profits alone, you fail to realize that you may not actually see that cash and are out $500 worth of labour or resources until those invoices are paid (sometimes up to 90 days later)!
So, how can you focus on cash management?
It’s simple, really.
By working with CPAs or Firms that prioritize cash management advisory services, you are setting your business up for success. These firms can provide a quick snapshot of your business’s health from all angles, allowing you to make strategic decisions based on a “what if” analysis.
How it works is your business’s accounting software is synced with their cloud-based cash management program, allowing your most up-to-date financials to be considered when making decisions. They will be able to provide advice with regards to monitoring cash positions, managing your cash so that you’re never in a negative flow situation, and modeling scenarios based on potential business moves you’re considering. You can see how these moves will potentially play out and make the best decision for your business goals.
Now, it’s rare that profits come without cash, but as we mentioned, this cash can be delayed by up to 90 days (or sometimes even longer) depending on how your invoicing cycles work. Cash Management can allow you to look at which clients of yours are good clients to have, and which ones may be costing you money in the long run (i.e. paying invoices late or not paying their interest).
Sure, taking actions on overdue accounts receivables is an option to improve your cash position right away, but what if you never had overdue receivables to deal with in the first place? Make room for clients that pay on time and gain insight into the proper timing of invoices that works best for your business.
For more information like this or to set up a demo/meet with an advisor, visit dryrun.com.