Surprisingly the correlation between cash and profit can be a million miles apart. Often when talking to clients we find that they are somewhat surprised with the reported profit as there is certainly not a lot of cash in the bank.
The reality is that the profit is often lost in the working capital requirements of many businesses. If you are a retailer you have stock that you have to pay for before you sell it, or if you are wholesaler you have both stock and money owed to you by your customers.
Understanding the “Working Capital Cycle” which is the relationship between cash, stock, money owed to you and money you owe in the short term is very important to all businesses and particularly small businesses that are often under resourced. By example many business owners would be understandably excited about winning a million dollar contract.
However some businesses are simply not able to service the contract in the short term as you need adequate working capital to pay costs associated with servicing the contract before the customer pays any money. The reality is that there needs to be a degree of planning with every tender or business proposal to ensure that the work will be sustainable and you are adequately resourced financially.
Every business is different and there is no magic benchmark of what working capital needs to be retained in order to allow for what could be called sustainable growth.
How can your business advisor help? This may be as simple as examining the working capital components in your business and determining what amount of cash you need to fund an additional $1 of sales. By example if the net working capital requirement is 10 cents per $1.00 of sales, you will need to have available $1,000 to cover additional sales of $10,000.
This is really an education process for business owners and certainly is something that we assist our clients with to ensure that they are best placed to move forward with their business. Find out more about our Business Improvement services or contact our team today on (08) 9392 7600.