There is one fundamental question that every successful trade business owner should have sitting at the front of their mind… And that question is… How can I make more cash?
Because revenue is vanity, profit is sanity, and cash is reality.
And this is very important to understand, because there is a BIG difference between profit, and cash.
Profit and cash are NOT the same thing…
I don’t care how big or small your company is,
If you’re just staring at your profit and loss statement every month, dancing up and down because sales are going up,
Just assuming that your cash position is also improving with every sale…
Then you’ve got a big problem.
Because the profit and loss statement tells us, how much profit we’re making on paper…
It is your paper-based profit… NOT cash in the bank.
And this can be confusing sometimes… But here’s how it works.
You send an invoice.
Sales go up on your profit and loss…
But that sale only ever becomes cash, once the money exchanges hands.
You’ve actually got to collect it!
If you’re not collecting cash, it doesn’t matter how many sales you’re making,
Your cash position isn’t improving…
So don’t get caught up in the trap of thinking that the only way to improve your cash flow is to sell more…
Because locking in more sales revenue doesn't automatically dump more cash into your bank account...
That's just not how it works.
And on top of that, collecting cash is really just step one...
How does cash flow through your business?
How well is it actually managed?
This is critical to understand.
Because there have been plenty of great contractors out there that were highly profitable on paper but still went under because of a cash problem.
And maybe you can relate to this situation…
Where you're really busy, you're making a whole bunch of sales, you feel like you're running around all the time...
But you never seem to have enough cash in the bank...
Sales are up... but cash is getting tighter and tighter...
So, this brings us back to the profit and loss.
As business owners, we typically love to look at our profit and loss statement because it's easy to understand...
And we avoid the balance sheet, because it's more complicated...
But the balance sheet is equally as important as the profit and loss statement when it comes to understanding and improving our cash position.
To make more cash, you need to understand how to increase your profit and decrease your working capital (that's the money it takes to run your business).
To increase your profit, we discuss price, volume, margins, and every item of overheads - items all found on the profit and loss...
To decrease working capital, we discuss accounts receivables, inventory or works in progress, any loan facilities, and accounts payables - items all found on the balance sheet.
So, what does this tell us?
Well for every trade business, there are only 7 key levers that you need to focus on to improve your profit, cash, and overall business value.
These are:
1. Price
2. Sales volume
3. Cost of goods sold
4. Overheads
5. Account’s receivables
6. Inventory or Works in progress and;
7. Accounts payable
And we call this our 7-lever secret to boosting cash flow... something we help every one of our clients with because, again, profit and cash are NOT the same thing...
So, the lesson here… make sure you're across your exact cash position... and then use these 7 key levers to improve your results.
If you are unsure how to do this, then contact our team here at Trade Business Accountants - we'd love to help!
If you're an electrician, plumber, painter, carpenter, or any other tradie business owner who is looking for assistance with your tax, accounting, and bookkeeping - click here to learn more!
