To effectively manage your Cash Flow, you need to learn the difference between Cash and Profit.
Your business can be showing a healthy profit but still struggle to pay bills due to poor Cash Flow. A major cash drain on your business will often be Owner’s Drawings (Director’s Loan) why? Simple because it is not reflective as a tax deductible expense for your business and therefore, doesn’t appear on your Profit & Loss it does reflect however, on the Balance Sheet as a liability that is owed to the Business.
The misunderstanding of this can lead to an underestimation of the true costs (including the many hours an owner contributes) of running a business.
Some businesses have also registered to pay GST on a non-cash basis (called ‘accrual’). This is where a business pays the GST on all income that has been incurred or accrued including outstanding debts rather than only on what has been received (Cash basis). This can cause severe cash flow problems when your customers pay months after an invoice is issued because the tax will need to be paid long before the money actually comes in.
We can all have a ‘gut feeling’ of what’s going on as far as the money coming in and going out of our business. But how do we really know what is happening what is the real picture?
Only ‘actual real-time clean data’ can give you the reality on how your business is truly performing Obtaining vital metrics for your business is needed which includes:
- Debtors Customers that owe money to your business
- Creditors Suppliers money your business owes to them
- Your GST owed and payroll liabilities PAYG and Super
- Equity seeing where you equity is building and where your money went
As Cash Flow Strategist and professional bookkeepers Accountant Ready Books can assist with identifying your cash flow problems. Once detected we can then implement cash flow strategies to defeat cash flow crisis helping to grow your business with solid cash flow management.
