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Cash or Profit – Survive or Excel by Jo Haigh

Jo Haigh

Jo Haigh

You know the saying ‘sales are vanity, profit is sanity’ but this little sentence ends with ‘but cash is absolutely essential’.

Businesses do not fail because they don’t make profits (at least, not immediately), they fail because they run out of cash. Once it’s gone it’s gone! And now, of course, the cash wells have all but dried up. Keeping what you have, and squeezing the last drops out of your assets, is more than desirable, it’s essential to survival.

So, first things first, are you fully exploiting your key assets of stock and debtors? In other words do you have optimum stock levels and are you collecting as promptly as possible?

Try this simple format to work out what each day tied up in stock and debtors is worth to you.  You may also like to check if you may just be paying too quickly. I call it the RIP ratio so try ripping into your assets.

Cash or Profit

Although the banks may not be open for new business, and negotiations fairly futile if you have no choice of lender, you can at least check out you are not being ripped off. Go to to access software to help you check you are being charged correctly (and I assure you, you probably will be).

It’s vital you know how much cash you are creating, the example below shows you how to calculate this, do it every month. This Free Cash Flow (FCF) is a vital document; it shows you what free cash the business can generate after maintaining, or expanding, its asset base.

Assess what cash you have actually created.  You need a balance sheet for the beginning and end of the period under examination.

Then use the following basic formula – (is not foolproof but is a good and simple technique):

Net Profit + Depreciation

–          Increases (or + Decreases) in Debtors

–          Increases (or + Decreases) in Stock

+      Increases (or –Decreases) in Creditors

–          Decreases (or + Increases) in Bank Loans / Overlays

=      Net Cash Flow

And finally, make sure you know the difference between profit and cash, they are not the same !  For example If your business is able to buy an item for £10 and sell it for £20, then you have made a £10 profit. But in a B2B situation you will not get the cash until later – sometimes much later.

So, at this stage, your business shows a profit but you have no cash to pay your other bills and wont have until you get the money in.  So, how do you plan to manage that – well I guess you can wait to pay your suppliers but how long will they wait, indeed will they wait at all ……………….. see what I mean.  I think I heard someone say “Simples” – but maybe not !.

Jo Haigh is a Partner and Head of Corporate Finance for MGR a company based in London and Yorkshire and a partner in the fds Group, a specialist training and development business. More >>
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