I have had the privilege of working with and being mentored from some great business people throughout my career. What has been evidently clear is their simple and common sense approach to their businesses and it is these approaches that have led to their success. It is something that I try to apply to our clients and our team day in day out.
It always amazes me though how many advisers and business owners complicate and over engineer many things in their business. Maybe this is a big part of why the majority of start ups fail in their first two years of business.
One of the greatest rules I was told early on is ‘there needs to be more coming in than going out’. Simple right? Yet how many businesses get it wrong. No matter what business you are in, CASH IS KING! Whether your cash is physical, EFTPOS clearances or direct deposits, it is still about money in the bank.
I get asked how can you go broke if you are profitable? It always comes back to understanding that profit is not cash and vice versa.
Businesses can realistically only do 3 things with profit:
- Increase Assets
- Reduce Liabilities
- Pay the Investors/Owners
Sure there may be many examples under these categories but it always comes back to one of these. So whilst a business may be profitable, the cash could be tied up in assets (trade debtors, stock, new equipment), used to pay liabilities (trade creditors, ATO, the bank debt) or the owners could be paying themselves (dividends and drawings) which they are entitled to but only if the business can afford it. Plenty of profitable businesses are no longer here, large and small, because they did not respect that CASH IS KING.
If you do not have a cash flow budget for your business, get one. If you are not getting proactive advice to help you monitor your position and make the right decisions, change advisers. Keep it simple and your business will have a great chance to prosper.