Innovation and enterprise blog

07 July 2014

Confusion costs cash!

Jm webOur resident finance expert, Johnny Martin explains the most common finance mistakes that he has come across.

One of the hardest things when you are starting or running a business is getting to grips with the financial jargon and of course the numbers!  Too many business owners think that it’s OK to muddle by and that somehow it will be alright on the night.

As a result, many don’t start because they can’t raise cash, or they start and crash and burn because they run out of cash or they start and create a really successful business with the help of a (so-called) business partner who goes on to rip them off so they lose out on their cash! You wouldn’t believe the number of times at my workshop at the British Library, people say that’s what happened to me!

 So what causes this confusion and how can you make sure you understand your business finances and make sure you don’t waste cash? 

To start, let’s cover THE biggest cause of confusion and especially confusion between business owners and finance people – why is profit not the same as cash?!  Well if you were running a very simple fruit seller business, buying on the wholesale market, selling on a street corner, and chucking out unsold fruit at the end of the day – then the increase in cash in your pocket would be the same as profit. 

BUT as soon as you start selling on account, buying on account, having stock, buying equipment then cash and profit are different in the short term. 

This explains why you have two reports – the cash flow looking at cash and the profit & loss report which matches income and expense when they happen i.e. based on activity.  The profit and loss is there to help you assess profitability or viability – can you sell for more than your costs?

If you didn’t match income and expenses in the same period you would never know your true profits.  For example you hire a freelancer but they don’t invoice you at month end, you would still make a provision for these costs in your management costs. 

Otherwise you would understate freelance costs in the month when they happened and over state in the month the invoice came in or indeed when it was paid…This is known as accruals accounting – matching income and expenses based on activity.

To help overcome this kind of confusion I run a regular workshop at the Business & IP Centre called Get Cash Flow Confident.  If you come to the workshop you also get access to my online training video Talk Money and a 5 year forecasting template. 

Whatever stage you are at – please, please, please don’t ignore finance.  Successful businesses understand their numbers, know their numbers and act on them.  By all means delegate finance but don’t abdicate responsibility – it is just too important.

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