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For small business owners, achieving profitability is often one of the main goals for operating the business. However, no matter how creative your business or products are your business may still struggle, and inevitably fail, if you can't manage your company's cash flow.

Cash flow 101: Why you should worry about cash flow instead of profit

As a reference, one study found that 82% of businesses fail due to poor cash flow management.. Especially If you are a new SME (where cash management is especially challenging), it should be a key area of focus as you get your business up and running. Before we get too ahead of ourselves, let’s first explain the difference between cash flow and profit.

What is the difference between cash flow and profit?

Cash flow is a measurement of the actual money coming into and going out of your business. The simplest method of measuring your cash flow is through your bank account -- simply put, your business will have positive cash flow if there is more in the account at the end of the period than when the period began (and vice versa). Some common sources of cash flow in come from sales and investments and cash flow out comes from cost of goods, salary and interest payment etc.

On the other hand, the measurement of profit is more of an accounting concept and while it may be useful on paper (and in audited financial statements), it may not provide the necessary detailed insights into how a company is doing on a day to day basis.

Let’s walk through a couple of examples.

For example, you have a suit business in Hong Kong and last month, you sold $200K HKD in suits and the suits cost you $80K HKD wholesale, your gross profit would be $120K HKD

The first step to calculating profit is to take your total revenue and then subtract the cost of the goods sold. The difference is your gross profit.

Gross Profit = RevenueCost of Goods or Services Provided

  • Revenue:                              $200,000 HKD
  • Cost of Goods Sold         -$80,000 HKD
  • Gross Profit:                      $120,000 HKD

Let’s say you also spent $20K HKD in marketing to achieve this level of revenue. Marketing expense would be considered operating expenses (along with things like rent, equipment purchases, payroll, etc.) are taken out of Gross Profit to get to Net

  • Revenue:                                $200,000 HKD
  • Cost of Goods Sold            -$80,000 HKD
  • Gross Profit:                         $120,000 HKD
  • Operating Expenses:        -$20,000 HKD
  • Net Profit:                             $100,000 HKD

Congrats! You now have $100K HKD in profit on your income statement.

While this profit calculation seems simple enough, there are a few areas missing when it comes to understanding the health of your business.

1. Late or delinquent payments

Once you have made the sale, this $200K HKD is registered as revenue and included on your income statement. However, most companies do not receive the full payment amount immediately. For example, if your customer decides to send $50K HKD / month for 4 month, you’ll only be able to use $50K HKD / month for all of the other expenses that you need to pay. We also haven’t thought about worst case scenarios like what if the customer goes out of business after a couple of months and you cannot actually receive the full amount for the orders?

2. Pay loan back

If you had borrowed some initial capital to start your suit business, your income statement will not show the principal repayment of these loans.

3. Paying Inventory

If you spend more funds on buying additional inventory (ie. suits) from your wholesaler, you will probably have to pay it up front and not realize sales until some time later.

4. Taxes

While you may have a positive net profit, this is before taxes which will unfortunately decrease these earnings even further.

Cash flow is all about timing -- just because you’re profitable, there are usually other expenses that do not appear on your income statement and will affect your business.

Have a look to our article : Cash is Still King : How Startup can manage and improve their cashflow

Why is managing cash flow important?

1. Make your business more predictable

Seasonality is a often common part of running a business. Sales at ski resorts are higher during the winter and dumpling shops are more popular during Chinese New Year. A good cash flow management process will allow you to predict these cycles and come up with a plan to address them. A couple of examples:

  • Provide discounts for customers that pay earlier. This way you would be able to collect and use cash faster!
  • Run a marketing campaign to drive additional sales quickly
  • Apply for business loans through a bank or find alternative lending sources
  • Delay your cash outflow by using your credit card (you can also use Reap for expenses that do not accept cards)

2. Understand when you can grow

Good cash flow management allows you to better understand when you can use more funds towards growth. If you have made in $100K HKD in sales, but actual payment won’t be made until 3 months later, you may not funds to buy better equipment just yet. When you look at your cash flow over weeks and months, you'll know how much to keep on hand, and how much you can stash away or spend on growth.

Final thoughts!

Obsessing over cash flow is an important consideration regardless of the size of your business. In the long run, it may also improve your relationship with your customers and suppliers if you can more accurately assess your cash flow to your requirement for paying and receiving payments.

Hopefully, it’ll bring more peace of mind to your day to day operations and alleviate some stress!

现金流101:您应重视现金流而非利润的原因

作为参考,一项研究发现, 82%的企业因为现金流管理不善而倒闭。尤其对于刚开始运营的中小企业(中小企业现金管理尤为困难)而言,现金流管理应伴随业务量的增加,以及经营的持续,成为关注的重点。得出结论前,让我们先就现金流与利润之间的区别,做一下说明。

现金流与利润有何区别?

现金流是衡量企业实际流入与流出资金的一个指标。衡量企业现金流最简单的方法,就是查看企业的银行账户。简而言之,若企业银行账户的期末余额大于期初余额,就是正现金流(反之则为负现金流)。部分常见的现金流入渠道,包括销售与投资;现金流出渠道,则包括

货物成本、薪资及利息支付等。

另一方面,利润这一指标则更多是一个会计学概念,可以用于撰写报告(及编制接受审计的财务报表),却无法让您对企业的日常运营状况,具有必要、详细而深入地了解。

让我们来看几个例子

例如,您在香港开设了一家服装公司。上个月,公司服装销售额为20万港币,而批发购入服装的成本是8万港币,那么,您所得的毛利就是12万港币。

计算利润的第一步,是计算总收入,然后减去售出货物成本,所得差额就是毛利。

毛利 = 收入 - 所提供货物或服务的成本

  • 收入:               200,000元港币
  • 售出货物成本          -80,000元港币
  • 毛利:                 120,000元港币

另外,我们假设您为了实现这一收入,投入2万港币用于营销。营销费用(以及租金、设备采购、工资等)会作为营业费用,从毛利中扣除,得到的就是净利

  • 收入:                    200,000元港币
  • 售出货物成本              -80,000元港币
  • 毛利:                     120,000元港币
  • 营业费用:                 -20,000元港币
  • 净利:                     100,000元港币

恭喜您!现在,您公司损益表中的利润一栏,可以填入10万港币了。

这样计算利润,看起来非常简单,但用来了解企业经营健康状况时,漏洞就多了。

1.    延后或拖欠付款

销量一旦实现,这20万港币就记账为收入,并体现在损益表中了。但,绝大多数企业都不会立即收到全额付款。例如,如果客户决定每月付款5万港币,4个月付清,您每月就将只有5万港币,可用于支付其他所有需要支付的费用。 我们还没有考虑最糟糕的情况,比如两个月后,客户公司倒闭,您事实上就无法全额收取订单货款了,又该怎么办呢?

2.     还贷

如果您开设服装公司的部分启动资金是借来的,那么,对这些贷款本金的偿还,是不会体现在损益表中的。

3.      为存货付款

如果还投入资金,用于向批发商额外购买库存(也就是服装),您可能会不得不先付清款,再经过一段时间后,才能实现销售。

4.      缴税

贵公司的净利可以是实现了盈利的,但这是在缴税前。缴税会令人惋惜地让企业收入进一步减少。

现金流只与时间有关 – 因为贵公司虽然盈利,但通常需要支付其他费用。这些费用不体现在损益表中,却会对企业造成影响。

看看我们的文章:现金始终最重要:初创企业如何管理与改善企业现金流

为什么对现金流进行管理是很重要的?

1.  提高业务的可预见性

季节性,这是企业运营通常都会面临的。冬季,滑雪场营业额提升;春节期间,饺子馆生意更加兴隆。良好的现金流管理流程,使企业能预见这些周期性出现的情况,并制定计划加以应对。比如:

为客户提供预付款打折优惠。这种方法,让企业可以加速现金的回笼与使用;

开展营销活动,快速提升销量;

通过银行申请贷款,或找到其他贷款资源;

使用信用卡付款,延迟现金流出(您还可以使用Reap,支付无法用信用卡付款的费用)。

2.  知道企业发展的时机

良好的现金流管理,让企业可以对将更多资金投入用于发展的时机,具有更清醒地认识。如果实现了10万港币的销售额,但实际到账要在3个月后,那您就还没有资金用于购买更先进的设备。当您数周及数月关注现金流后,就会知道可支配的资金有多少,及可留存或用于企业发展的资金有多少了。

总而言之!

无论企业规模大小,考虑紧盯现金流,都是重要的。长期来说,如果能根据收、付款需求,更准确地评估现金流,还可以密切企业与客户,以及供应商之间的关系。

希望本文,能为您减轻一些压力,让您以更加愉快的心情开展企业的日常运营!


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