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Above is a two minute podcast from a series called ‘Two Minute Business Tips’.
Below is the transcript for the “5 Reasons why your business is making a profit but there is no money in the bank” podcast. You can listen to the podcast here.
5 Reasons why your business is making a profit but there is NO money in the bank
Hi, Welcome to 2 minute business tips. I’m Scott from Beyond the Numbers.
In this episode I list the 5 reasons why your business is making a profit but you have no money in the bank.
Dun & Bradstreet quote that around 90% of small businesses that fail, fail because of poor cash flow. The problem is not the businesses were making a loss but they had poor cash flow. So it is possible to go broke making a profit.
Let’s get started.
The first reason is the owner is taking more money out then the business is making. This can be common reason. This will usually stem from the owner not having a personal budget and will be spending money whenever they see it is in the account. Another possible cause is the business’s profits have dropped but the owners continue to take the same amount out as when it was more profitable.
The second reason is high loan repayments. The business has borrowed and the profit is not enough to cover the loan repayments. A business will get caught on what I call the credit carousel. They feel like they are moving forward but they end up back where they started after they have made a loan repayment.
The third reason is not setting aside money to pay the tax man. This is happens a lot to new small businesses or when a business makes a large increase in profit. Treat tax as a necessary expense.
A short side note, your business’s profit needs to be enough to cover these first three reasons. That is you need to make sure your business makes enough to cover your personal drawings, your loan repayments and tax as a minimum. If your business is not making enough to cover these three then you will always have a cash flow problem.
The fourth reason is not collecting money from customers promptly. This can be caused from not sending out invoices promptly, poor credit checks or poor follow up procedures. Always work on the premise that ‘prevention is better than cure’ when dealing with customers. That is have the best procedures before the sales is made and you will save yourself time and money after the sale is made.
Lastly, the final reason is poor stock control. A business will carry too much stock or will not measure the amount of stock they have except once a year. If you treat your stock like your bank account you will increase your cash flow.
There are five reasons why you may not have money in your bank account. I have found it isn’t usually just one reason but a combination of a number of reasons and generally all these reasons stem from one problem. The business owner doesn’t know the critical numbers.
Remember, love your numbers and they will love you.
That’s all for this episode. Thanks for listening. Bye for now.