Hi there fellow business owners,
Today, I want to share some insights on the importance of understanding the cash flow cycle in your business. This concept is crucial for maintaining financial health and ensuring your business runs smoothly.
The Business 101 Cycle
Let’s start with the Business 101 Cycle, a fundamental concept I recently discussed in a webinar. This cycle is a powerful way to understand the difference between profit and cash in your business.
- Owner Investment: To kickstart your business, you’ll need to invest money, which can be used to purchase necessary assets.
- Generating Profit: These assets are then used to generate profit. Remember, you can boost your profit by increasing sales or margins. However, be mindful of overhead expenses as they can drain your profit if not managed effectively.
- Turning Profit into Cash: Once profit is achieved, it gets converted into cash. But beware—slow collection of debtors, high inventory days, and other drains like loan repayments, taxes, and supplier payments can impact your cash flow.
Maximizing Cash Gains
To improve your cash flow, consider these strategies:
- Faster Debtor Collection: Shorten the time it takes to collect payments from customers.
- Decrease Inventory Days: Reduce the time stock sits unsold.
- Negotiate Payment Terms: Extend payment terms with suppliers to hold onto cash longer.
- Tax Management: Efficiently manage your tax obligations
Reinvesting for Growth
The cash that remains after covering all expenses can be taken out as drawings or personal loan repayments. Alternatively, you can reinvest this cash back into the business to purchase more assets, leading to further income generation.
Key Tip: The goal is to move through the Business 101 Cycle as quickly as possible to increase your return on investment.
Watch the video here where I talk about the Understanding The Cashflow Cycle
Mick
I’d love to help you achieve your business dreams, please don’t hesitate to contact me;
07 5646 4050
mick@ignitionaccountants.com
Book a call for a complimentary Proactive Accounting Meeting to discuss your accounting profitability
Digitally enhanced by