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A question I get asked, time and again by clients, is this:
“If I’m making a profit why do I never have any money in the bank?”
Here is the problem, and this is important to remember: profit and cash flow are two very different things. Firstly, profit equals on paper revenue minus on paper expenses. Cash flow equals the actual money flowing into and out of a business at any given time and is affected by the timing of liability payments, loan repayments, directors drawings when your debtors actually pay and so on. The problem is, cash flow lags behind profit for most businesses.
Adequate ‘positive’ cash flow is essential for the survival of any business, yet this is something that over 50% of small business owners struggle to manage. Bandaging cash flow problems with temporary cash infusions is a strategy often used by entrepreneurs, but a business ultimately needs to fix structural problems in their operations and financial management habits to build longevity.
The cold, hard statistics...
Small businesses in Australia are under increasing pressure and an alarming number are struggling to stay afloat.
Research has shown that 51% of business start-ups do not survive beyond their fourth year of operation. ASIC reveals that 81% of businesses that became insolvent in 2012/13 were small businesses employing less than 20 people. The primary 2 causes of failure are:
- Poor strategic management, with 42% of owners reporting this problem and,
- Inadequate cash flow or high cash use, with a further 41% citing this as a driving factor.
32% of businesses are trading at a loss, and 33% are experiencing poor financial control, admitting that they are not keeping good records.
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