Avoid bankruptcy: Monitor your cash flow
Written By: Alice Robinson
The goal of any business is to achieve a profit and the reason for this is obvious; if you are operating at a loss, you are getting no financial return for your efforts and where is the good in that? But what people sometimes forget to consider is the state of their cash flows.
Sometimes there can be a misconception that if your books are showing you that you are highly profitable then there is nothing to worry about because you will have plenty of money to keep operating in the future. But you do not use profit to pay for business expenses; you use cash and it is entirely possible to be profitable on paper and insolvent at the same time. Picture your business accounts as a high school chemistry experiment. To make your solution, you need a solvent and a solute. The solvent is the component of the solution that is present in the greatest amount and you need that solvent in order to dissolve your solute and make the solution. To ensure your business can remain operational, you need to see your cash as the solvent and your profit as the solution. Insolvency will not help you make a profit.
Do not make the mistake of brushing your cash flows off as ‘another time consuming account to monitor’ because the life of your business may just rely on how well you can predict and plan for cash flow crises. Cash flow forecasts are also useful tools that will help you to find potential problems and make the changes early to increase your cash and lower your risk of insolvency. Put in the time now and save yourself the stress later.
If you do not have time to monitor your cash flows or produce a forecast yourself, hire a professional bookkeeper to do it for you. That way you can always be reassured that you are not only turning over a profit but that you also have the day-to-day funds to keep your business safely in operation.
If you would like to have a chat to one of our bookkeepers about your cash flows, head over to the Enquire and Book page to book a consultation.