A common question we are faced with when working with business owners always seems to be, “We are profitable, but we don’t have any cash. What’s happening?” The answer is normally a poor Working Capital Cycle.
But before we get into that, let’s look at the below example.
We have completed both jobs and they have both been invoiced. Only Job One has paid. However, we’ve had to pay the expenses for both jobs, we’re left in a cash deficit but making an overall profit.
In the short –term, business owners are able to cover this lack of cash. But in the long-term this is not sustainable as there is no cash to start the next job.
The image below is an example of the Working Capital Cycle of which cash is the main driver. The more cash in the cycle, the more work you can do, resulting in more cash injected into the cycle. However problems occur when, in the example shown above, people don’t pay. This then reduces the cash in the cycle, reducing the amount of work you can do.
How do we fix the issue?
- Ensure that you have a profitable product or service.
- If it’s costing you more to produce than what you’re selling it for, your cash in the cycle will quickly diminish.
- Have sufficient investment in the business at the start.
- Obviously to get the cycle turning, there needs to be some investment in the business. Make sure you seek advice on what sort of cash should be invested to ge things moving.
- Invoice Jobs at the earliest possible point.
- The earlier you can get the cash for a job the better. An example of this may be in the construction industry where they take progress payments during a build.
- Have a robust debtors system
- Making sure that reminders are sent to customers about upcoming payment dates and that it’s easy for customers to pay.
- Have a collection process for overdue invoices. What steps do you take to ensure you get the money?
- Don’t draw too much cash out of the business.
- Many people begin to see profits being made and immediately draw this cash out of the business. Ensuring there is sufficient cash to get through the tough times and in time, grow, is very important for the health of cycle.
If you have any questions or comments about this, please email [email protected]. One of the team would be more than happy to help.