Part 2 – Profitable business, but not a healthy bank account


Following on from our last post, let’s see what some of this might look like using an example…

You’ve won a contract worth £9000. You have estimated the costs for delivery that work with be £1000 of hardware/stock, and £3000 of labour. You need to pay for the hardware on delivery, but you have given your customer credit of 30 days. The credit is from date of invoice, but you don’t issue invoices until projects are completed. 

We’re not going to further complicate this, by adding in VAT.

So, in summary, sales of £9000, less £1000 hardware, less £3000 labour = profit of £5000. 

In terms of timescales it would look like this:

  1. Month 1 – purchase hardware and accounts show it as stock

  2. Month 2 – complete the work and pay team

  3. Month 3 – invoice the customer – accounts shows the sale

  4. Month 4 – receive payment 

And the cashflow looks like this:

Screen Shot 2019-07-05 at 10.11.15.png

At the end of month 3 your accounts are showing £5000 profit, but your cash balance is -£4000 – that’s known as a net cash out flow.

As you can see, only when you have completed the project, and received payment, does the cash equal profit.

Clearly, real life is never as simple as my example. At any time you’ll have a number of projects at various stages, and the usual overheads of running a business. So, in reality your cash or bank balance is never going to equal your profit.

However, it is essential for you to remember that more companies fail because they have run out of money, rather than them not being profitable. 

In the example we have shared, it takes the business four months to have the money in the bank. 

Predicting your cash flow, and taking into account these ebbs and flows is essential to your success. Knowing if you need to raise finance to cover shortfalls is something you will need to know in advance – or the growth of your business will falter.

If you would like more help with this, please contact us on 01420 362 363.