Is Your Business Profitable But Has Cash Flow Problems?


In business, a healthy profit and loss account is often seen as a sign of success, a testament to the viability and growth potential of a business. However, a common dilemma faced by many business owners is the stark contrast between what the books show and the actual cash flow situation. As a business owner, you might find yourself in a situation where, despite showing considerable profits on paper, your business experiences cash flow problems. This scenario can be perplexing and even alarming, prompting the question: Is there something amiss with your business operations, or could it be an issue with how your financial records are managed?

As a UK-based bookkeeping and accounting company, the team at Joanna Bookkeeping knows first-hand how business owners can benefit from outsourcing important tasks to an experienced accountant and bookkeeper, and what this partnership can mean for the long-term financial wellbeing of your business.

Get in touch with our Oxford-based accounting and bookkeeping team and let’s have a chat!

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Cash Flow vs. Accounting Profit

The issue often lies in understanding the difference between cash flow and accounting profit. Traditional accounting practices recognise income and expenses based on when they are earned or incurred, not necessarily when money changes hands. This accrual basis of accounting means that your profit figures might look impressive while your bank account tells a different story.

For instance, if you issue a sales invoice to a client with a 60-day payment term, this income boosts your profit figures immediately, despite the actual cash not being received until two months later. This discrepancy can lead to a situation where, despite robust profitability, cash flow remains tight, affecting your ability to cover day-to-day expenses or invest in growth opportunities.

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What to Do?

✅ Check Your Accounting Records

The first step in addressing cash flow problems is to ensure your accounting records are accurate and up-to-date. This process involves confirming that all invoices and bills have been processed and that bank reconciliations are completed. This way you know you can reply on any reports. If your business utilises other systems or software, it’s crucial to integrate this financial information into your main accounting platform, like Xero, to avoid any discrepancies that could distort your financial overview. A professional accountant or bookkeeper can help you ensure your records are in good order and they can also help with accounting software implementation.

✅ Evaluate Your Payment Terms with Clients

Another vital area to scrutinise is your payment terms with clients. If the terms are too lenient, it might be time to reconsider. Extending excessive credit periods to clients can significantly strain your cash flow. Assess whether your payment terms are competitive yet sustainable for your cash flow needs and consider introducing incentives for earlier payments to encourage quicker cash inflows. You can also try some other practical tips for receiving prompt payments from your clients which we share in a separate article. This will help to ensure that your business is not only profitable on paper but is also in a healthy financial position.

✅ Explore Payment Solutions

The payment methods you offer can also influence how promptly clients settle their invoices. In today’s digital age, providing a variety of payment solutions can make it easier and more convenient for clients to pay you. Services like Stripe or GoCardless can facilitate smoother transactions, potentially speeding up the payment process and not only making your business profitable but also improving its cash flow. And you can also integrate many payment solutions with your accounting software. Talk to an experienced accountant from Joanna Bookkeeping if you need help with this.

✅ Reassess Payment Terms with Suppliers

On the flip side, managing how and when you pay your suppliers can also impact your cash flow. If you’re paying suppliers prematurely, you might be putting unnecessary pressure on your cash reserves. Evaluate your current payment schedules and deadlines to see if there’s room for negotiation. Extending payment terms or synchronising supplier payments with your incoming cash flows can help maintain a healthier balance.

Profitability and cash flow are both critical components of a successful business, but they are not always aligned. Understanding the difference between accounting profit and cash flow is essential for effective financial management. By taking proactive steps to ensure accurate record-keeping, optimising payment terms with clients and suppliers, and leveraging modern payment solutions, you can address cash flow problems and strengthen the financial health of your business. Remember, the goal is to ensure that your business’s cash flow supports its operations and growth ambitions, reflecting the true potential indicated by your profit and loss account.

At Joanna Bookkeeping, we’re passionate about supporting ambitious businesses at every stage of their journey. If you’ve reached the stage where you need some guidance, reach out. We’re here to help you grow, one step at a time.

For more insights and professional assistance with your bookkeeping needs, visit our website and book a free call with our Oxford-based accountant.

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