Profitable Yet Broke?

You can be profitable and still be bankrupt.

Unfortunately, for millions of small- and medium-sized businesses, there is no bailout or rescue plan if you run your accounts down to £0 while still owing money, no matter how profitable you are.

Planning and monitoring your cash flow is the only way to be successful and stay in business.

People think in terms of profits instead of cash. We all do. When you and your friends imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be. We are trained to think of business as sales minus costs and expenses, which results in profits.

Unfortunately, we don’t spend the profits in a business. We spend cash. Profitable companies go broke because they had all their money tied up in assets and couldn’t pay their expenses. Working capital is critical to business health. Unfortunately, we don’t see the cash implications as clearly as we should, which is one of the best reasons for proper business planning. We have to manage cash, as well as profits.

So what’s a business owner to do?

• Revise your business plan. Envision the worst-case scenarios. Think about the steps you’d take to survive. There’s no need to produce a new full-blown plan. Do just the planning you need: sales, expenses, profit and loss, and the cash flow. Plan your emergencies in advance and negotiate with your bank before you may need their help, with proper projections and whilst you have breathing space.
• Secondly, instigate a robust credit control policy. Let people know your payment terms and stick to them.
• Thirdly, support your trading partners. It’s a myth that you have 30 days to pay your bills. If you trade with an important partner, don’t delay paying them – you may just find that they’ve gone bust in the meantime whilst waiting for you to pay your bill. Very bad news for them and bad news for you.