I so often hear this question:  “I am showing a profit in my business but I have no money.  Where is it???”  There are a number of places to look, and a few things you can do to improve your cash flow.

Debtors

When you review your income statement, the sales might look great and the bottom line nicely in the black.  Yet, you look at your bank statement and the balance is depressingly low.  The answer will be lurking in your balance sheet.  The first thing to look at is your Accounts Receivable (Debtors) balance.  These are your outstanding invoices for which you haven’t been paid.

How promptly *do* your customers pay you?

Your accounting software should be able to give you an Aged Report – say Current/30/60/90 days.  If your normal credit terms are 7 days and you have a lot of invoices showing as 90 days overdue, then you will need to action these immediately.  Use a collections agency for best results – depending on where you are, you may be able to recover the collection costs from your late paying customer on top of the overdue account.

It may also be worth considering reducing your credit terms, say from 30 days to 7 days, or offer a small discount for up front payment.

If your business supplies a product or service for which you need to purchase specific materials, obtain an upfront deposit from your customer, with balance due on completion.

Creditors

A second factor in contributing to your low balance may be by paying your suppliers too soon.  Take advantage of the credit terms they offer your business.  Paying your suppliers early doesn’t help your cash flow, especially if you’re paying for product you haven’t sold yet.  If you have a good ongoing relationship with your key suppliers, then you may be able to negotiate more favourable terms for your business.

Debt Servicing

Another factor which will hit your bank account but not be reflected in your profit is the servicing of existing debt.  If you are paying off a credit card balance or an overdraft facility, the payments will reduce your balance sheet liabilities.

Rapid Expansion

If your business is undergoing a rapid expansion, this can place huge pressure on your cash reserves.  Unless you have capital to fund your expansion, this is definitely the time to pay particular attention to your collections.

Related posts:

1. Factoring