There are cash flow problems, and then there are profit problems. 

As a growing business, you may think you have a cash flow problem. The truth is, you possibly have a profit problem due to insufficient margins being achieved on your sales. So how do you fix this?

Tip 1: Start with a new approach to finance

Cash flow problems are cyclical. They represent the ebbs and flows of a business’ cash cycle. They occur when there are big time gaps between you paying your suppliers or staff and clients paying you – or when you are growing fast and investing in new staff, business infrastructure or capital costs.

Businesses experiencing growth often believe they have cash flow problems. 

Yet, they are reluctant to accept they’re not making a profit. Your average positive thinking, entrepreneurial business owner thinks that a shortage of cash occurs because the next opportunity hasn’t come in yet, and is more likely to admit there is a cash flow problem – a timing issue – than a profitability problem – a structural issue.

So, you need to consider that not all the problems of the business are just cash flow related. You cannot lose sight of reality when your business is experiencing growth or momentum.

Focusing solely on cash flow can lead to incorrect analysis.

Instead, your approach to cash flow management needs to change – this usually starts with accrual accounting rather than just cash accounting.

Tip 2: Monitoring Your Cash Flow

How can you possibly know whether you have a cash flow problem if you’re not one hundred percent sure what your profit actually is? Are you getting enough cash in your bank? It’s difficult to tell if your financial analysis is inaccurate. 

We often get asked, my profit & loss statement shows number, but there’s never that much cash in the bank.

This is because you don’t have the accounting policies in place to make the correct analysis and the policy here surrounds accrual accounting.

In cash accounting, your profit shows you the cash that you pay for services and the cash that you receive for services you delivered during the month.

But, there’s a larger, more complex system to your finances. Sometimes you have a lot of unpaid bills that are related to expenses during that month. On top of that, people have paid you for work that was carried out in a previous month.

If you’re a fast-paced business, you invest and spend more month-to-month. But, your profit-loss data just shows the cash movements within the time frame.

At Sequel CFO, we incorporate accrual accounting, which gives you a larger picture. We involve the actual cost and the actual revenue you made this month in your report. This means that when we start comparing financial ratios, we should be able to start to see some trends that are accurate.

Now you’ve got control, and at the month’s end, you’ll have a set number of processes to make sure that all the items are recorded in the right period. You’ll have visibility over your finances because you’ll have a report that’s telling you what your true profit position is, which means we can better predict what your cash position is going to be.

Tip 3: UsE Xero and Cloud to Control Movement

Our CFO’s can build cash flow management strategies for the future using efficient systems like Xero.

Innovative technology like Xero puts you in an environment where your information can be shared with your advisors and decision makers, so you’re already ahead.

This is where the world is moving to. Previously, only big businesses could get this level of reporting – and you needed really expensive and ineffective IT to deliver it. 

The scope of innovation in Cloud accounting means being able to have all your data accessible by a lot of different systems, and a lot of people, all at once. So, from our outsourced service, you can gain strong control of your cash flow by having live, real-time reporting of what’s happening in the business. 

The earlier a company transitions to Cloud accounting, the easier it is to do because the problem is only going to get worse as you get bigger. The more your company grows, the longer it will take to implement the transition.

Tip 4: Utilise a Financial Mentor’s Expertise

At Sequel CFO, we can give your business optimum visibility and control over your finances.

At the month’s end, we provide you with a profit & loss balance sheet that is up to date and accurate, using accrual-based accounting.

We look at your overall growth, client retention, and much more client-side reporting. In each report, we give a lot of commentary on what happened throughout the last month.

Next, we can start to look at some high-level macro KPIs that will have financial benefit for your business. Then you get to look at your cash flow reports.

If you don’t have control of your new profits because the business has become complex and fast growing, the question then becomes “What’s the best place for us to spend the money that we’ve got?”.

This is where we start doing much more complicated forecasting. We throw the business model on a whiteboard and we look at available opportunities.

Engaging with our Melbourne CFO services will automate your processes as much as possible, so you can become much more efficient than you were with just a bookkeeper.

Instead of utilising a bookkeeper, you can have a skilled, seasoned financial expert who adapts to your business’ growth.