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Why Businesses Go Broke, While Making a Profit

There’s a saying in business that, “you can go broke making a profit.” As you don’t pay rent, meet payroll or pay your bills with profit.

You pay them with cash.

A business can make a lot of sales, have a book full of orders, have delighted customers, have a great reputation, be growing, and yet still go broke.

Why? Cash Flow.

The business might be profitable on paper, but have no money left in the bank. They cannot pay their bills and they become insolvent.

The tragedy in this is that cash flow crises can often be averted. They can be predicted, planned for and then contingency measures put in place.

For example, if a business has seasonal effects where some months are busier than others, or knows it has some jumps in expenses approaching – then these expenses can be planned for and compared with the planned income in those months.

Which would you prefer to do?

With the second option you would not only get the loan, you’d impress the bank manager and strengthen the relationship for further funding.

Apart from the relationship with your bank, there’s also the immediate effect of sleeping better at night. We all seek a level of certainty to comfort us. Knowing what lies ahead in business and planning your cash flow gives you peace of mind and confidence. It’s a good feeling.

This is one of the reasons we are so passionate about helping our clients put together cash flow forecasts, to help them keep their business on track and to avoid any stressful, unpleasant surprises in the coming months.

It doesn’t matter whether a business is a one-person hairdressing or lawn mowing business, or a 10 person, 20 or 200+ person business.

Every business needs a cash flow forecast.

In helping our clients build realistic cash flow forecasts, we can also spot problems and make suggestions that help improve the business’ cash cycle. This puts money in your bank account.

For example, a combination of negotiating better terms with suppliers, tightening up and enforcing your business’ own credit terms and reducing stock holding and waste can have a powerful positive effect on your cash flow.

So, if a cash flow forecast is so crucial, why do many businesses not have one?

Simple… Business owners get busy, busy pleasing customers or clients, busy dealing with staff, busy paying suppliers and busy generating sales.

Your next step …

So, what should do about it? Call us. Take action.

Call Tony Rule on 03 9886 0800 or email at tonyr@tagfinancial.com.au to make a time to meet and discuss your options.

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