Getting a good grasp of your cash flow can do wonders for your business, maximising profit and minimising loss of time, money, and sanity. It’s more simple to do than people think — especially if you have a solid business plan.

1. The common cash flow mistake

One of the most common mistakes trade business owners make when trying to improve their cash flow is only accounting for what’s on their profit and loss statement. When someone does this, they’re failing to realise that profit and cash are not the same things.

As the saying goes, “Revenue is vanity, profit is sanity, cash is reality”.

The profit and loss statement doesn’t tell you anything about cash — it’s simply an indication of the profit that comes as a result of the business’s sales and expenses. But there’s a lot more to cash flow than that.

Cash flow concerns:

• • Assets purchased
  • Money owed
  • Payment schedules
  • Work in progress
  • Director loans
  • Other considerations with real dollar costs.

So, if you’re running a trade business based on the profit and loss statement alone, then what you’re seeing on paper may not reflect what’s actually happening in regard to your business’ finances.

2. Understanding the balance sheet

Understanding the balance sheet can be a challenge, but you still need to understand it. If you can comprehend the balance sheet in tandem with your profit and loss statement, then you’re away — you’ll have no problem uncovering your cash flow. 

3. Your four-chapter cash flow story

To improve your cash flow and keep more profit in your trade business you need to look at your numbers like a story that’s told in 4 chapters. These 4 chapters represent each component of the formula we use to calculate cash:

Chapter One: Net Profit

Found at the bottom of your profit and loss statement, net profit is the profit your business makes after every cost has been factored in.

As we’ve outlined, this is often as far as people get with analyzing their finances, which shouldn’t be the case. To prove this point, let’s explore a real case that Trade Business Accountants had with a company that we’ll refer to as ABC plumbing. In the year before working with Trade Business Accountants, ABC Plumbing had grown revenue by 17%, operating profit by 19%, and net profit by 21%. Business appeared great. But, while ABC Plumbing did have a net profit of $208,302, they had also lost -$326,000 in cash.

Here’s how net profit fits into our four chapters:

Net profit sits in the left-hand column (meaning that it positively affects cash flow) because the more profit you make (assuming you collect it), the more cash you’ll generate in your business. 

Chapter Two: Working Capital Invested

Working capital is the amount of cash needed to run your business over the short term. This is where the balance sheet comes in.

On your balance sheet, there are only three lines that determine working capital:

• • Accounts receivable – the money owed to you by customers.
  • Works in progress (WIP) or stock – the work you’ve done at your expense that isn’t yet invoiced for or stock in the form of supplies on hand that are waiting to be allocated to a job and invoiced).
  • Accounts payable – the money owed to your suppliers.

These three things make up your working capital because they largely determine the amount of cash coming in and going out of your business in order for it to operate.

At this stage, you want to calculate the working capital invested this year on top of last year. This will show if the profit made this year was used to fund any increase in working capital from the year before. 

To find the working capital invested, calculate the difference in accounts receivable (e.g. the difference between 2020 and 2021), plus the difference in work in progress (WIP) and/or stock, minus the difference in accounts payable.

In the example above, accounts receivable has increased $191,781 ($863,014 – $671,233 = $191,781), WIP or stock has increased by $395,455, and accounts payable has increased by $152,926.

Meaning, all up, ABC Plumbing invested an extra $434,310 in working capital in 2021 compared to 2020.

This is where working capital invested sits in the four chapters:

It’s sitting in the right-hand column (which has a negative effect on cash flow) because the more working capital invested, the more cash your business needs to operate.

Chapter Three: Other Capital Invested

To make the balance sheet simple, we’ll refer to anything other than working capital, as just ‘other capital’. These are complicated accounting terms like accruals, prepayments, provisions, deferred tax, other current assets, liabilities, etc. that have little to do with the operational management of your business, so just leave that for your accountant and group them as ‘other capital’.

To calculate other capital, we’ll have to take another look at the balance sheet. The formula is the difference in equity (the value of the business if all assets were sold and all debts were paid off), plus the difference in debt (the value that is owed to creditors like banks), minus working capital invested.

In the example below, the combination of debt and equity represents the total increase in funding, or capital, in the business in 2021, used to fund the increasing cost of operations in 2021. So, by subtracting the working capital invested figure from this total, we can calculate the leftover, which is other capital invested in 2021.

Here, we can see that ABC’s equity has increased by $208,302, and the combination of short-term and long-term debt has increased by $326,007. That means, once we subtract the working capital amount of $434,310, we can see that they’ve invested an extra $100,000 in ‘other capital’ in 2021.

This is where other capital invested sits within our four chapters:

It also sits in the right-hand column which negatively affects cash flow. Like working capital, the more you invest in other capital, the more cash that gets drained from your bank account.

Chapter Four: Cash

This is the money left over after everything else has happened — arguably the most important factor of all. To calculate cash, we use the following formula:

In this example, as we said, despite everything looking great on the profit and loss statement and making $208,302 in Net Profit, ABC Plumbing actually lost $326,000 in cash. 

This is why you can’t improve your cash flow without looking past net profit and exploring all aspects of your business’ finances. If ABC were to continue only focusing on what their profit and loss statement was telling them, they would have remained fooled into thinking business was great and things could have gotten much, much worse.

So, now that you know how to understand your cash flow, let’s talk about improving it.

4. Improve cash flow & keep more profit

Flooding your business with more cash and keeping more profit comes down to two things: increasing profit & decreasing working capital. This is done through 7 key levers in your business: 

To increase profitability, we look at: 

• • Price
  • Volume
  • Cost of goods sold (COGS)
  • Overheads (found on the profit and loss statement)

To decrease working capital, we discuss: 

• • Accounts receivable days
  • WIP or stock days 
  • Accounts payable days (All found on the balance sheet).

If you want to make more cash in your business, these are the only seven things you need to know. To prove it, here’s another case study of a Trade Business Accountants client, let’s call them XYZ Electrical.

XYZ Electrical has been operating for many years now and they came to Trade Business Accountants wanting a better return on investment from their business, because, despite making $150,000 in Net Profit, XYZ Electrical only made $30,000 cash.

By adjusting their 7 levers by only 1% or 1 day, XYZ could’ve put an extra $59,495 cash in their bank account (a 300% increase in cash!). But, instead, XYZ Electrical increased their prices by 10%, which caused them to lose roughly 10% of their overall volume. 

A 10% decline in work would cause most trade business owners to panic, but when the price is 4.5 times more sensitive to cash than volume (every 1% increase in price equated to $19,000 in cash for XYZ, whereas every 1% increase in volume equated to $4,300), the decision to increase prices was a no brainer, even if it meant sacrificing some work. Investing $1 to get back $4.50 meant XYZ Electrical made $147,000 more in cash.

Outside of price and volume, the cost of goods sold (COGS) was reduced by 5% due to greater efficiency in delivery, better structure/planning, and better deals from suppliers. Overheads were reduced by 10% by removing unnecessary expenses that weren’t adding any value to the business. Receivable days, payable days, and WIP/stock days were reduced by 2 days, simply by invoicing and collecting money faster, while restructuring how they pay their suppliers. 

All up, these tweaks resulted in an extra $317,000 cash — just by focusing on the 7 key levers, XYZ Electrical increased their cash by 1157% from the prior year!

This is why, if you want to improve your cash flow and keep more profit, you need to understand your whole 4-chapter story and then only focus on the 7 key levers found on your profit and loss statement and balance sheet. Think, how many 1% or 1-day changes can you make in your business?

5. Get started on your own trade business

To get started and make things easier, Trade Business Accountants have created an Ultimate Cash Flow Boosters Checklist with 101 strategies that you can use to find the hidden cash flow leaks in your business across the 7 levers.

If you want to further your cash flow mastery, explore Trade Business Accountants’ cash flow masterclass. It includes step-by-step instructions, real client case studies, actionable strategies, and a whole bunch of exclusive free tools and resources. Use the code ‘TRADIFY100’ at checkout for free access to the cash flow training.

This is a guest article written by Trade Business Accountants, a specialist tax, accounting, and business advisory firm based in Australia.

This article is not intended to be financial advice. We recommend discussing any specifics with your accounting provider.

Good reviews are gold for your business. You can spend all day telling people how wonderful and great your product or service is, but what they really want is proof.

Showcasing testimonials and written or video case studies is a great way to do that because prospective customers are less inclined to believe what you, as a business, have to say. People are more interested in hearing and believing what other customers have to say, rather than what your sales staff have to say.

If this is an area of opportunity for you, start off with small steps

Ask your most loyal customers to send you a short statement on why they chose you, or what they like about your product or service.

Once you have a collection of these testimonials, use them as part of your marketing: on your website, back of your business cards, or even printed collateral.

Ask for them to add their review on your Facebook business page and on your Google Business profile. (Reviews show up next to your Google Business Profile in Maps and Search). Make the process easy by providing a direct link after a successful sale. (you can choose to have reviews on or off in the settings of your page – so you can decide if you are ready to implement this).

For bigger purchase decisions, case studies offer prospects a lot of detail on why you are the obvious choice. Choose customers or clients that you have a good relationship with. Ask a series of questions to highlight how the customer interacts with your business, the problem it solves for them, why they chose your business over the competition, and what they would say to others wanting a similar experience.

Your most loyal and satisfied customers can sell your business for you, through their story and their words.

The following content was originally published by BOMA. We have updated some of this article for our readers.

The beginning of a new calendar year is an excellent time to review the year just finished and reflect on what worked, what didn’t, what you’d like to change and new things you’d like to implement.

Take the time to review the year and acknowledge all that has happened, good, bad or indifferent. Examining the year with an objective perspective can provide valuable insights to prepare for the next business year. Planning and goal setting will help provide a focus for your business efforts.

Your Yearly Business Review

• • What were the most significant impacts on your business in the last 12 months? How well did you meet the challenges?
  • What worked well last year? What systems, technology, products or services were successful?
  • What accomplishments can you celebrate?
  • What situation, event or experience provided the biggest learning opportunity?
  • What is the biggest challenge or frustration you face as you prepare for the year ahead?
  • What did you most enjoy during the year? Do more of it. What did you least enjoy? Do less of it!
  • Analyse your financial reports. Are you earning what you’d like to? Is the business sustainably profitable?

Get Ready for a Great Year

While there are many metrics you could evaluate to track business performance, we’ve given you just a few ideas to inspire your business planning for a positive start to the year.

If you’d like to chat about what you can do differently this year to enable your business to thrive, book a time with us today.

The following content was originally published by BOMA. We have updated some of this article for our readers.

It takes a lot to start a business. Few business owners start with exit in mind.

You start with a dream and the tenacity to make it real, and make it grow. When do you start thinking about what you want to happen when you retire?

Some business owners talk about funding a lifestyle but actually work is their lifestyle. They’d rather go with their boots on. But what happens to the business? Assets? Clients? Employees? The dream and the hard work that made it real?

Don’t let your exit strategy happen by accident. Three ideas to start with:

• • Successors: Family members? Your team? Franchisees? A few key people motivated to form a partnership? Who is interested? Who has the potential and passion for it?
  • Alternatives to exit: The idea of retiring bores you to snores. Retain an interest in the business. Share the knowledge you’ve built up, have the satisfaction of seeing the business continue to grow and discover the lifestyle you could have now that you have time to have a life.
  • Ready to sell: If selling is your best option, is your business market ready? To achieve the best price, you need your business to be in the best shape. Analyze it from the point of view of a potential buyer. Is there clear documentation on business processes and performance? Is your business performing at peak? What needs to happen and what’s a realistic timeframe?

These are things we can help with. Start the conversation with us today.

We can run a cost-benefit analysis

Could buying a building be the right choice for your business? We can work with you to analyze the costs and benefits of each option, to help you make an informed decision about which one will put you on track to achieve your goals.

Get in touch today, we’d love to hear from you.

The following content was originally published by BOMA. We have updated some of this article for our readers.

Tired of paying rent for your commercial premises and considering buying a premises for your business?

Owning a building works best if your business is well-established, you have money to invest, and you’re taking a long-term approach – it can take many years for this decision to pay for itself.

The advantages of owning a commercial property

• • You no longer need to worry about dealing with a landlord. You’re the landlord now, so your lease won’t end and you get to make all the decisions about how the premises is used. If you want to make changes to the fitout, it’s up to you.
  • You don’t have to worry about rising rent. Eventually, owning a premises will be cheaper than leasing. When you continue leasing, you can expect the rent to keep going up – sometimes the jump may be substantial.
  • If your business moves or closes, you still own the building. This can be a highly valuable long-term asset, depending on the type of building and the potential tenants.

The advantages of leasing your business premises

• • Leasing gives you more flexibility. You can move if your business gets too big for the space, or downsize if more people are working from home.
  • You don’t have to worry about paying building expenses like rates, warrants of fitness, and insurance.
  • Your rent is likely to be lower than the servicing costs for a commercial property loan, boosting cashflow so you have more to invest in the growth of the business.
  • The landlord will take care of repairs and maintenance on your building – when there’s a leak, for example, it’s not your problem.
  • Commercial buildings are typically expensive and financing is costly, so you’ll need to do plenty of research before you decide to make a purchase.

We can run a cost-benefit analysis

Could buying a building be the right choice for your business? We can work with you to analyze the costs and benefits of each option, to help you make an informed decision about which one will put you on track to achieve your goals.

Get in touch today, we’d love to hear from you.

The following content was originally published by BOMA. We have updated some of this article for our readers.