In most businesses, you should be evaluating profitability on a regular basis. This is an extremely important measure.
However, equally important, and critical is evaluating cash flow!
During a fiscal year, you would be looking at profitability weekly or monthly, but daily you should be looking at whether you are generating enough cash to keep all operations going.
As an example, be aware that you have enough cash receivable from the past 30 days to cover two to four paydays.
Whether you have staff or work alone, you always have cash demands. To offset these demands without cash flow, it would be necessary to draw down a loan or a similar line of credit. The reality of this is that borrowing has to be repaid at the right time, with interest of course.
The alternative to self-financing is utilizing the cash received from the business.
This makes evaluating the frequency of cash payments a crucial measure. In doing so, investigate the following:
a] The payment schedule of your customers and when to expect payment.
b] Whether any of the items sold are dependent on weather or other timing, e.g.: you are purchasing winter scarves inventory in July that will not likely generate cash profit for 3 to 4 months.
c] Know how vital it is that there are continuous sales generating cash.
ASE’s advice to our business clients: evaluate current cash flow along with potential profits.
And always remember that in any business ‘Cash is King’.
Jim Wilson ASE