How to Keep More of Cashflow: Keeping Your Profit in Your Bank Account
You work hard to make money for your business. But do you know where it goes? Sometimes, you may look at your bank account and wonder why it doesn’t match your profit.
The reason is that profit and cashflow are not the same thing. Profit is the difference between your income and expenses. Cashflow is the movement of money in and out of your business. To keep more of your profit, you need to manage your cashflow well.
In this article, we’ll show you how to do that.
Why cashflow matters
Cashflow is important because it affects your ability to pay your bills, invest in your business, and take out profit. If you have poor cashflow, you may run out of money even if you have a lot of profit.
One of our customers had this problem. They made $70,000 profit in three months, but their bank balance went from $30,000 to -$10,000. They were confused and frustrated.
We asked them if they wanted to turn their -$10,000 into $50,000. They said yes. We helped them improve their cashflow by changing their working capital cycle. Within six months, they had more than $50,000 in their bank account.
What is the working capital cycle
The working capital cycle is the process of turning your profit into cash. It involves these steps:
- You start a business
- You buy some equipment and inventory
- You sell your products or services
- You pay for some overheads
- You collect money from your customers
- You take out some profit or reinvest it in your business
The working capital cycle can be fast or slow. The faster it is, the sooner you get your cash. The slower it is, the longer you have to wait.
Your profit can get stuck in different parts of the cycle. For example:
- Your employees may not finish their work on time, so you can’t invoice your customers
- Your customers may not pay you on time, so you can’t collect your money
- Your equipment or inventory may be too old or too much, so you can’t sell them or use them
- Your debt may be too high or too short-term, so you can’t afford to pay it back
To improve your cashflow, you need to speed up your working capital cycle and free up your profit.
How to speed up your working capital cycle
Here are three ways you can speed up your working capital cycle and get more cash:
- Create a routine: Make a plan for when and how you will pay and collect money. Follow up with your customers and suppliers regularly. Don’t let them delay or forget their payments.
- Reduce your inventory: Inventory is the stock of products or services that you have not sold yet. It costs money to buy and store inventory. It also takes time to sell it. Try to keep only as much inventory as you need. Sell or donate the excess inventory to get some cash.
- Finance your equipment properly: Equipment is the machines and tools that you use for your business. It costs money to buy and maintain equipment. It also lasts for a long time. Don’t use your short-term cash to buy long-term equipment. Use a loan or lease instead. This way, you can spread the cost over time and keep more of your cash for other needs.
By following these tips, you can speed up your working capital cycle and keep more of your profit in your bank account.
Want help with your cashflow? Drop us a note today.
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