“Business is going well — my sales have increased.”
That’s great.
But here’s the more important question:
Has your profit increased — and where is the cash?
One of the most important financial lessons for any self-employed business owner is understanding the difference between turnover, profit and cash flow.
Turnover tells you what you’ve sold.
A business generating £150,000 of annual sales may sound successful.
But turnover alone tells us very little about its financial health.
What did it cost to generate those sales?
Profit tells you what you’ve earned after costs.
If sales increase by £30,000 but the additional staff, materials, subcontractors, marketing and overheads cost £28,000, the business has only generated an additional £2,000 before considering tax and other commitments.
Growth without adequate margin can create more work without creating much more wealth.
And profit doesn’t necessarily mean cash in the bank.
You could report a healthy accounting profit while still struggling to pay bills.
Why?
Because cash may be tied up in:
• Customers who haven’t paid you yet
• Stock
• Equipment purchases
• Loan repayments
• VAT and tax liabilities
• Owner drawings
• Other working-capital requirements
This is why managing a business from the bank balance alone can be dangerous.
Ask yourself:
Do I know my gross profit margin?
Do I know which products or services are most profitable?
Do I know how much customers owe me?
Do I know what I owe suppliers and HMRC?
Do I have enough cash to cover the next three to six months?
And importantly:
If my turnover doubled tomorrow, would my cash flow cope with the growth?
Good financial management isn’t simply about recording what happened last year.
It’s about using financial information to make better decisions today.
That’s where regular bookkeeping, management accounts, cash-flow forecasting and meaningful financial analysis can make a real difference.
Don’t measure success by how busy you are or how much you sell.
Measure it by whether your business is profitable, cash-generative and financially sustainable.
At May & Moy Management Accountants & Consultants, we help business owners understand the story behind their numbers — and use those numbers to make better business decisions.
Stay compliant, stay profitable.