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Let’s take a look at the core components of your profit and loss budget and how they relate to your business:

Sales income

Your sales income figures reflect your business’ ability to:

• generate the right number and type of leads (a function of marketing)

• keep existing customers (a function of sales, team, delivery of your product or service and business strategy in terms of pricing and offerings)

• create new customers from leads generated (a function of sales)

• have a clear strategy for the number and type of income streams and what percentages each contributes (a function of business strategy).

COGS and gross profit

Your Cost of Goods Sold (COGS) and gross profit figures reflect your business’ ability to:

• quote effectively (a function of sales, specifically estimating)

• complete jobs within budget and on time (a function of delivery of your jobs)

• ensure proper pricing (a function of both strategy and sales)

• have visibility of true gross margins and profits (a function of finance)

• allocate labour and materials to the correct jobs and income categories within your P&L (a function of finance).

Fixed expenses

Your fixed expenses figures reflect your business’ ability to:

• forecast the non-variable running costs (a function of both finance and admin)

• forecast wages; I suggest recording non-billable wages in expenses and billable labour (employed and subcontracted) in COGS (a function of finance)

• create and effectively execute a marketing budget and plan (a function of marketing).

Net profit

Your net profit figures reflect your business’ ability to:

• to do all of the above items successfully (a function of leadership, team, systems and strategy)

• to estimate what your true capacity is (a function of leadership, strategy, team and finance).

Your leaders need to have the ability to understand which areas of your business affect the various areas of your profit and loss and which team members have responsibility for producing results and outcomes within those areas.

They must have a solid tactical and strategic plan for their team to implement to realise these results and outcomes.

Cash flow management isn’t rocket science. Put simply, it means doing everything possible to ensure that money flows into your business as quickly as possible and exits it as slowly as possible. It also means keeping an eye on the future and taking steps to mitigate any potential issues that may creep in down the line.

Of course, it’s not all that simple. Hence the high business failure rate tied to cash flow problems. If you’re to avoid becoming just another statistic, check out these tips for avoiding surprises.

1. Profitability Doesn’t Equal Cash

Profitable businesses are just as likely to close their doors for cash flow reasons as unprofitable ones. If your costs are high or you’re reinvesting your profits back into your business then your cash flow can quickly become compromised.

2. Forecast, Forecast, Forecast

Get as much foresight as you can into when cash is forecasted to enter and exit the business. Cash flow forecasting is deeply important in this regard. Your cash flow forecast will not only help you understand your future cash situation it can help you spot any surprises and take steps to mitigate them before it’s too late.

3. Revenues isn’t Realized Until it’s in the Bank

Your monthly budget may be balanced and your P&L statement looks great, but if revenue doesn’t change hands (in the form of a client payment) before your monthly bills must be paid, then you may have a cash flow problem, albeit short-term.

4. Understand Seasonality

Business seasonality has a big impact on cash flow. If you run a seasonal business then many of your outgoings (inventory purchases, staffing costs) are made before you sell anything. Plan ahead and analyze trends closely so that you can identify highs and lows and manage your stock and hiring accordingly. Check out these tips for surviving business seasonality without cash flow problems.

5. Plan for the Unexpected

Unexpected expenses and emergencies such as illness, a natural disaster, the loss of your star sales person, and so on, can all impact your bottom line. Have a plan to prepare for these eventualities, whether it’s having a financial cushion, a succession plan, business insurance, or cross-training key sales personnel.

6. Become a Pro at Invoicing and Collections

Late paying clients are a real problem for small businesses. Here are just some of the stats:

• Only 50% of companies pay on time (D&B)
• 64% of small businesses report having invoices go unpaid for at least 60 days (NFIB)
• 14% of small businesses cite late payments are their biggest concern (Kauffman Foundation)

Look for ways to overcome this burden by invoicing promptly (as close to the sale as possible), setting up invoice reminders, and practice good invoicing hygiene. Collect and chase payments as soon as it looks like your payment terms may be in jeopardy.

7. Be Ready for Growth

With growth comes additional costs – inventory, equipment, marketing campaigns, etc. You can prepare your, without incurring cash flow issues, by breaking through some of the barriers that impede small business growth, including cash.

Simply put, profit is an excess of revenue after expenses have been subtracted. Cash flow is the inflow and outflow of money from your business. Put another way, profit is what you record when the sale is made and cash flow is what you record when the money is actually received.

Cash flow is crucial for supporting the daily operating expenses of your business, paying wages, paying taxes and purchasing inventory. If this money is tied up in accounts receivable, you’ve got serious problems. Over time, a lack of profits will have a negative impact on cash flow, but cash flow — or lack thereof — is always an immediate issue.

For SMBs this means that getting paid on time is crucial to staying operational. Without cash, bills don’t get paid. When bills don’t get paid, businesses fail.

So how to keep the cash flowing?

• Offer discounts for prompt payments

• Ask for a deposit when you take a client’s order

• Issue invoices immediately and set payments expectations from the outset

• Automate your invoice reminders to follow up on overdue accounts

Easy, right?