• Why Do Profitable Businesses Sometimes Have Cash Flow Problems?

    We explain why profitable businesses can sometimes have cash flow problems, and what to do.Why do profitable businesses sometimes have cash flow problems? The answer, is because profitability and good cash flow are not the same thing. Whilst it is more likely that your cash flow will be good if your are profitable, it is far from a certainty.

    Why Do Profitable Businesses Have Cash Flow Problems?

    The reason that profitable businesses can still have cash flow problems is to do with how quickly their customers pay, versus how quickly they have to pay their creditors. A cash flow problem occurs when you have to pay your creditors sooner than you are being paid by your customers, or if you are trading at a loss i.e. the income from your sales is not covering the cost of sales, regardless of the time taken to pay you.

    If you are selling products or services at a profit i.e. more than the cost of producing the products or delivering the services, you can still find yourself having to pay for the supplies, staff costs etc. before you have been paid.

    You can make a profitable sale e.g. selling at £1,000 something that cost £500 to supply. At the point of sale you have had to pay out the £500 production cost, and yet you only have an invoice for £1,000 outstanding. So on paper you have make a profit, your accounts will show a profit, but you haven't had any cash in from the sale - yet you had to pay for the production costs. This creates a cash flow problem.

    It can also be created by temporary changes in the balance between cash flowing into, and out of your business. For example, if you have seasonal surges in sales volumes. This can drain your cash flow if you need to purchase raw materials, or pay staff to cope with a seasonal sales surge.

    Detailed Examples

    For a detailed explanation see our article: Cash Flow Versus Profit.

    You can find another worked example of the difference between cash flow and profitability in our article: explaining the differences.

    Improving Your Company Cash Flow

    There are a number of steps that you can take to try and improve your company's cash flow. These are explained in this short article and video: Improving Company Cash Flow. They include accelerating your cash flow by using invoice discounting to release some of the cash from your unpaid sales invoices.

    Share with:

Related articles

  • Read More

    Avoid The Queues - Personal Service Business Funding

    The launch of the Government's Coronavirus Business Interruption Loan Scheme (CBILS) on Monday will have been a welcome lifeline for many UK businesses.However, we have heard some reports of:Despite these issues we hope that it will help many UK businesses get through this crisis.There are alternative forms of funding, such as invoice finance facilities, available from a broad range of...

  • Read More

    How To Get Invoice Finance During UK Lockdown

    Are you concerned about needing to arrange business finance in the event of a UK wide lock down?We are still able to help you arrange, and use, an invoice finance (or factoring) facility, even if there is a full lock down in the UK, due to the novel coronavirus outbreak. Funding can be in your bank account within a few days.APPLY ONLINE NOWAt the present time, due to the outbreak of coronavirus,...

  • Read More

    Funding Big Services Contracts Relating To Novel Coronavirus

    As expected the Government's preparations for a novel coronavirus epidemic in the UK have led to big contracts being placed for support services. In some cases these government contractors will require additional funding.We have been speaking to a communications company that have been awarded a multi-million pound contract to provide communications services, relating to the coronavirus...

  • Read More

    Sales Finance For Hand Gel Sanitiser & Hand Wash Orders In Wake Of Coronavirus

    As the hysteria around the spread of coronavirus (COVID-19) across the UK continues, there are news reports that items are being rationed by some pharmacy chains such as Boots and LloydsPharmacy (BBC News 03/03/20).These appear to include items such as:I have heard local reports from friends that they have been visiting different shops to try and find hand gels and hand wash. It appears that some...

  • Read More

    Financing Large Orders For Coronavirus Preparations

    Concerns about Coronavirus (CoV or COVID-19) affecting the UK have been rising on the back of media reports, despite some statistics suggesting that the threat may not be as significant as that from normal seasonal flu and other diseases. Regardless of the situation, the Government is taking action.Concern about the virus formerly known as “2019 novel coronavirus" has resulted in the...

  • Read More

    Help With The Christmas Payments Slowdown

    Christmas is only a few weeks away again, and it is now that many businesses will begin to notice the annual Christmas payments slowdown. This is when customers can take longer to pay.This can be due to:The impact on the cash flow of suppliers can be a problem. If customers don't pay as promptly as they should, or have previously, you won't have the cash coming in to meet your own creditor...

  • Read More

    Are Cash Flow Constraints Stopping Businesses Taking Orders?

    Marketinvoice published some research in Finance Monthly, that indicates that some 87% of businesses may be stopped from taking on potential orders, due to cash flow constraints. That's a large percentage to be turning away business, at a time when our economy is experiencing little growth in GDP (Gross Domestic Product - the key measure of economic growth).There continues to be, what I would...

  • Read More

    How To Increase Working Capital

    This is a short article about how to increase working capital within your business.RAISE WORKING CAPITALWorking capital (WC), in financial terms, is the amount by which the current assets of a business exceed its current liabilities. Current assets, or short term assets are the:Current liabilities are all creditors that are due to be paid with a year.The calculation is as follows:In practical...

  • Read More

    How To Improve Your Business Cash Flow

    Three simple steps to improve the cash flow of your company are explained in this short explainer video:For further help improving the cash flow of your business, we have some additional resources that will be of interest.Firstly we have an article which explains 10 steps that you can take to increase cash flow.Secondly, if you are looking for a cash injection into your business, please see...

 

 

Examples of just a few of our finance partners:

marketinvoice
igf
marketfinance
castle
acg
skipton