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Keeping your business cash liquid – the difference between cashflow and profit

The foundational goal of any business is to make a profit. As a business owner, that’s one of your key financial aims – to make enough sales, at a big enough margin, to generate profit from your enterprise. But how does profit differ from cashflow? And why is cash king?

How do profit and cashflow differ?

To really understand the difference between generating profit and managing cashflow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cashflow is an invaluable business skill.

Let’s take a look at the differences:

• What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It’s driven by creating a profit margin and generating value from your products and/or services.
• What is cashflow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.

Why is positive cashflow so important?

‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cashflow then the business may not survive as long as the end of the year.

What’s needed is good cashflow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.

A business can generate high revenues and big profits, but still be cashflow poor. In other words, it can have profits at the end of the period, but have very little liquid cash to fund it’s day-to-day operations over the course of the period.

Talk to us about improving your cashflow management

Good cashflow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cashflow’ you need to proactively work to keep your inflows higher than your outflows.

As your adviser, we’ll help you set up detailed cashflow reporting and forecasting, so you can keep the business in that ideal positive cashflow position. And we’ll also look at key steps for keeping your revenues high, margins profitable and meeting your financial targets.

Get in touch to talk through your cashflow management.

Managing change in your business

Successfully implement change in your business

Research by Kotter International found that more than 70% of change projects within a business fail. Why is this?

The research findings show that employee engagement is the biggest factor. Whether it is a small change to one or two processes, or a company-wide change, it’s common for staff to feel intimidated by it.

So what can you do for successful implementation of change? Here are the principals from Kotter’s 8-Step Program:

1. Get the team onboard

Build support and create momentum behind the changes you are making by communicating the benefits with the whole company early on.

• Start honest discussions with your team and give dynamic and convincing reasons to get people talking and thinking about the change.
• Demonstrate what would happen if you didn’t make the change and what else it could affect in the future.
• Request support from customers in this instance who may love the product, outside stakeholders and others known in the industry to strengthen your argument.

Kotter suggests that 75 percent of a company’s management needs to support a change in order to succeed.

2. Form a powerful coalition from all areas of the business

Share the support you have from all areas in the business (not just the leadership team). Visible support from key people within the organisation will bring others on board and create a sense of urgency. Give these people key roles in the change process to help progress it.

Once formed, your ‘change coalition’ needs to work as a team, continuing to build urgency and momentum around the need for change.

What you can do:

• Identify the influencers in your organisation for this change, as well as your key stakeholders.
• Ensure that you have a good mix of people from different levels within your firm.
• Ask for a commitment from these key people.
• Work on team building within your change coalition.

3. Create a vision for change

Create an overall vision that helps everyone understand why you’re asking them to do something.

What you can do:

• Develop a short summary (one or two sentences) that captures what you ‘see’ as the future of your organisation.
• Create a strategy to execute that vision.
• Ensure that your team leading the change are all on the same page.

4. Communicate the vision

Embed this in everything you do so it is not lost in the day-to-day operation but a powerful part of this.

What you can do:

• Talk often about vision and change.
• Make sure the vision is applied to all aspects of the operations. For example, ensure it’s added to the training and induction program and is encapsulated into the relevant job descriptions and evaluations.
• Address people’s concerns and anxieties about it openly and honestly.
• Lead by example.

5. Remove obstacles

Check constantly for processes and structures that need to adjust to allow you to execute the vision and help the change move forward.

What you can do:

• Look at your organisational structure, job descriptions, and performance and compensation systems to ensure they’re in line with your vision.
• Recognise and reward people for making change happen.
• Identify, or hire, change managers whose core role is to deliver the change.
• Identify areas or team members that stand in the way of change, and find solutions.
• Take action to quickly remove barriers rather than letting them fester.

6. Create short-term wins

Create short-term targets – not just one long-term goal. Each ‘win’ that you produce can further motivate all the staff especially if it’s a big change requiring a longer process and help keep them on task.

What you can do:

• Reward people who help you meet the targets.
• Look for sure-fire projects that you can implement without help from any strong critics of the change.
• Don’t choose early targets that are expensive. You want to be able to justify the investment in each project.

7. Build on the change

Keep looking for improvements to the system to ensure the long term goals are achieved.

What you can do:

• After every win, analyse what went right, and what needs improving.
• Set goals to continue building on the momentum you’ve achieved.
• Develop a culture of continuous improvement.
• Keep ideas fresh by bringing in new people to lead the change.

8. Anchor the changes in your culture

Finally, to make any change stick, it should become part of the core of your organisation. Make continuous efforts to ensure that the change is seen in every aspect, giving it a solid place in your organisation. It’s also important that your company’s leaders continue to support the change. This includes existing staff and new leaders who are brought in.

What you can do:

• Talk about progress every chance you get. Tell success stories about the change process, and repeat other stories that you hear.
• Include the change ideals and values when hiring and training new staff so it is enforced from the start.
• Publicly recognise key members and enablers of the change.
• Create plans to replace key leaders of change as they move on. This will help ensure that their legacy is not lost or forgotten.