Your business is busier than ever. Sales are increasing, you are taking on more work, and perhaps you have even recruited additional staff. So why doesn’t your bank balance reflect all that hard work?
It’s a frustrating situation faced by many business owners. On paper, the business appears to be doing well, but in reality every month feels like a struggle to keep enough money in the bank.
The good news is that there is usually an explanation. More importantly, understanding what’s happening is the first step towards improving the situation.
In our latest SeavorChartered podcast, Graeme Seavor, Lisa Kay and Francesca Mitchell discuss why growing businesses can experience cash flow difficulties, the common mistakes business owners make, and how having the right financial information and advice can make a real difference.
Watch the full podcast on YouTube
More Sales Don’t Always Mean More Profit
One of the biggest misconceptions in business is that increasing turnover automatically means increasing profit.
Unfortunately, that isn’t always the case.
Imagine your business is taking on more customers and generating additional sales. That sounds positive, but what if the cost of delivering those sales is increasing at an even faster rate?
Perhaps:
- You’ve recruited more employees than you currently need.
- Your suppliers have increased their prices, but you haven’t adjusted yours.
- You’re spending more time or money delivering services than you’re charging customers for.
- Your overheads have increased as the business has expanded.
You could find yourself working harder, employing more people and generating more sales, but actually making less profit.
The important question isn't simply how much your business is selling. It's how much profit you're keeping from those sales.
This is why regularly reviewing your margins, staffing costs and overheads is so important.
Making a Profit Doesn’t Mean You Have Cash in the Bank
Even where a business is genuinely profitable, it can still experience cash flow difficulties.
Profit and cash flow are two different things.
Your accounts may show that you’ve made a healthy profit, but that doesn’t necessarily mean the money is available in your bank account.
For example, your business might be making £5,000 profit each month but paying out £10,000 in monthly finance repayments.
Although the business is profitable, those repayments could create a cash flow shortfall of £5,000 each month assuming the other cash movements broadly match the reported profit.
Over six months that could mean £30,000 less cash available to the business.
Other common reasons for cash flow pressures include:
- Customers taking longer to pay their invoices.
- Purchasing additional stock to support increased sales.
- VAT and tax payments becoming due.
- Investing in equipment, vehicles or machinery.
- Repaying existing loans or other borrowing.
Without understanding how these items affect your bank balance, it can be difficult to explain where the money has gone.
The Dangers of Growing Too Quickly
Business growth is usually something to celebrate, but growing too quickly can create its own problems.
This is sometimes referred to as overtrading.
As your business expands, you may need to pay additional wages, purchase more materials, increase stock levels or take on bigger premises before the money from your increased sales reaches your bank account.
The result?
Your business could be making more profit than ever, while simultaneously running short of cash.
And ultimately businesses need cash to pay their bills, regardless of how profitable they appear on paper.
That is why planning for growth is so important. Understanding how much additional cash your business will require can help avoid unnecessary financial pressure.
Short-Term Borrowing: Are You Solving the Problem or Delaying It?
There may be occasions where short-term borrowing is necessary. Perhaps an unexpected tax bill arrives, a large customer is late paying or you need additional funds to meet your commitments.
However, borrowing money doesn’t necessarily solve the underlying problem.
If you need to borrow money to get through the month, it’s important to understand why. Otherwise, you could find yourself in the same position again, potentially with additional interest and repayments to worry about.
The same applies to business borrowing.
Before taking on additional finance, consider whether the cash shortage is a temporary issue or the result of an ongoing problem with profitability or cash management.
Borrowing can be a useful tool, but it should be part of a considered financial plan rather than simply a way of postponing difficult decisions.
How Can You Improve Your Business Cash Flow?
The starting point is understanding your numbers.
You don’t necessarily need complicated financial reports or sophisticated forecasting systems. What matters is having reliable information that helps you make better decisions.
At SeavorChartered, we work with business owners to understand their financial position and identify practical improvements.
That might include:
Are you charging enough for your products or services? Have your costs increased without a corresponding increase in your prices?
Are your staffing levels appropriate for your current workload? Could better processes and more efficient working improve profitability without needing to recruit additional employees?
Could better use of cloud accounting software and regular management accounts help you identify problems earlier?
Do you know what money is expected to come into and leave your business over the coming months? Are you prepared for tax payments, loan repayments and planned investments?
For some businesses, particularly those in construction, reviewing matters such as VAT repayment periods and CIS arrangements could make a significant difference to cash flow.
Sometimes relatively small changes can have a substantial impact on the financial health of a business.
Don’t Wait Until Your Business Is Struggling to Ask for Advice
One of the key messages from our podcast is that your accountant should be able to offer more than just preparing your year-end accounts and calculating your tax bill.
Whether you are starting a business, experiencing rapid growth, struggling with cash flow or considering an important investment, having the right advice at the right time can be invaluable.
An experienced accountant can help you understand not only what the numbers are showing, but why they’re showing it and what you might be able to do differently.
And sometimes, simply having someone outside the business asking the right questions can help you see opportunities you might otherwise have missed.
Watch Our Latest Podcast
If your business is growing but your bank balance isn’t, our latest podcast explores these challenges in more detail.
Join Graeme, Lisa and Francesca as they discuss business growth, cash flow pressures, profitability and the importance of getting the right financial support.
Need Help Understanding Your Business Finances?
At SeavorChartered, we believe accounting should be about more than looking backwards at last year’s figures.
We want to help business owners understand their finances, make informed decisions and build more profitable, financially secure businesses.
If you’re working harder than ever but aren’t seeing the financial rewards you expected, it might be time for a fresh look at your numbers.
Get in touch with the SeavorChartered team to arrange a conversation about your business and how we may be able to help.
