If you’re in business the chances are that you need to make money.
The aim of the game is to have something left after all the bills are paid whether that’s because you want something for yourself, to pay dividends to investors or, if you run a social enterprise, to do some good for the wider community.
In simple terms we think of “making money” as making profit – when sales income is more than all the appropriate costs.
What people actually mean when they say they are “making money” is that there is plenty money in the bank to pay the bills that come in. Making profit doesn’t always mean that there is money in the bank.
In business nowadays the chances are you buy on credit, and you offer credit to your customers and you buy more stock that you need straight away so that you always have something to sell. All these things separate when the money is received (or paid) from when the sale actually happens.
So making money is actually more to do with generating cash.
In basic terms, a business which consistently makes losses will only be able to pay all of its bills if there is extra cash being provided from somewhere else. If my costs come to £5,000 but my sales are only £4,500 I won’t be able to pay all of my bills, there will need to be a bit of negotiation with suppliers or some savings to fall back on.
However making money isn’t simple even if the business is making profit.
It’s possible that I could be making profits and still not bringing in enough cash to pay all the bills when they are due.
Most obviously, if I buy stock for selling on in future I will likely need to pay my supplier for the stock before my customer has paid me, but if my customer hasn’t paid me how can I pay anyone else?
Accountants usually make some changes on paper to spread these sorts of costs over the year and match them to the sales that they relate to, but in cash terms my suppliers need the money more promptly to pass on to their suppliers.
What’s even more tricky is finding cash to invest in the business’ facilities. Buying a new delivery van has very little impact how much profit you make because only a small-ish part of the cost of the van relates to the sales in any given month, or year.
When it comes to paying for the van though, even with a hire purchase loan you’re going to need to pay a chunk of the cost as a deposit. That’s going to hit the bank balance.
So making money involves more than just selling for a profit. Cash may be king, but cashflow is complicated!
In my view the only way to tackle the cash challenges that every business faces is to plan ahead. Add to that a bit of action to make sure that:
– customers are paying,
– you’re not paying out for more stock than you need and
– you are making the best use of credit offered by suppliers
and you will be giving yourself the best chance to make money (and hold on to some of it) whatever stage your business is at.