Business finance can seem daunting, but it all comes down to three things:
- Profit – making money flow down to the bottom line
- Cashflow – “cash is king” – how much money does the business actually have?
- Value – how much the business is worth
Which one matters most to your business right now?
Profit
Profit is the measure most people are familiar with. It is what is left after you take all the costs away from the revenue.
So higher profits is a good thing, right? It means you’ve got more money?
Well, not necessarily.
For a start, the higher your profit, the more tax you will have to pay.
Investing in new projects to help your company grow will increase your costs in the short term (and lower your profits), but will increase your revenue in the longer term (so your profits go back up….unless you then invest in something else). This is how companies like Amazon keep growing and growing.
However, for most businesses it is important to make enough profit to pay the bills, keep the shareholders happy and still have some left to grow the business next year.
Do you know how your sales and profits vary from month to month? Use this simple tool to easily spot trends and patterns.
Cashflow
Profit is fairly easy to calculate. Cash flow is a bit harder. It depends on a number of things:
- How long does it take your customers to pay you after you bill them? (This may be instant in an online shop, or you may use invoices with payment terms).
- How long does it take you to pay your suppliers after they bill you? (This is probably a mix of instant payments and invoices).
- How much work do you perform on services before you can issue an invoice?
- If you offer annual contracts, how much of your annual sales is paid in advance?
- Or how much money is tied up in inventory? How long do you keep things before you sell them?
Ouch! How do you predict cashflow for the next quarter? How do you know if you will run out or how much you need to borrow?
Value
Some people own businesses like investing in property portfolios. They buy in with a plan to increase the value over the next 5 years and then sell on at a profit.
Other people own a business like they own their family home. They want the enjoyment it gives now, and are less worried about the end point. Though eventually they will want to move on, and at that point they will need a good return on their investment to fund the next stage in life.
Whichever type of person you are, it’s worth keeping an eye on the value of your business. How much it’s worth affects how much you can borrow. And if it’s not heading for the value you expect or need, the earlier you know, the more you can do about it.
How does this help?
I specialise in explaining complex concepts in simple language, to help you make more effective decisions in your business. Explore my available services, or arrange a no-obligation free call to discuss your issue and see how I assist you.