CONTRAVENING THE CASH-FLOW CODE
It is said that “profit is but a calculation, and that cash in the bank is crucial in order for a business to survive”. This, however, brings up the question of whether businesses can actually be sustainable in the long term when managed using a strategy of focusing only on cash flow. Long-term sustainability and business health is evaluated not only by the amount of cash in the coffers of a business but also by reference to other financial management elements.
Focusing only on cash flow has limitations, and the business owner who aspires to greater levels of success will eventually find himself or herself unstuck when potential funders, investors or business successors are sought. Questions asked will then relate not only to the cash flow of the business, but answers will also be required around many management matters including, but not limited to: net profit, gross profit, breakeven point, safety margin and stock turnover ratio.
Focusing attention exclusively on monitoring cash flow will not make the business owner aware of other useful financial information relating to the businesses and overall financial performance. Consequently, informed decisions cannot be made to safeguard and boost the profitability of the business and also, coincidentally, the all-important cash flow requirements of a sustainable business. Financial qualifications are not absolutely necessary to become a better financial manager. Business owners that grasp certain financial management basics will find themselves in an exclusive bracket of entrepreneurs with the ability to make educated decisions to boost their chances of success. Services offered by financial managers and accountants are invaluable in any business. They should, however, not only balance the business’s books, but also regularly provide key financial management information about the performance of the business in a format that enables the business owner to assess the health of the business and to make informed business management decisions. Financial reviews should be undertaken at least every month in the first two years of any business’s life cycle.
Business owners who are not able to afford the services of a financial manager or accountant should not despair. By using
basic mathematics and regular comparisons of their own information, the business owner can still improve they way he or she manages the business’s finances. The availability of accurate information and the abili ty to compare apples with apples i s, however, critical to the reliability of the financial management calculations alongside (if the business is VAT registered all figures should exclude VAT, if non-VAT registered, VAT should be included).