dollar wearing crownby Nabeel Chohan, AcceleratingCFO Consultant (UK)

Nabeel has extensive experience in management of financial reporting for global organizations, primarily within technology, media and entertainment sector. Nabeel played an instrumental role in M&A due diligence which lead to successful sale of Saffron Digital (c/o HTC Corporation) to a PE firm in 2013. He also played a key role with other high growth companies, managing finance, supporting management, securing funding, and raising capital. Nabeel is a Chartered Certified Accountant licensed in London, United Kingdom.

Cash is the ultimate lifeline of the business and the fuel to keep the engine running. Profits are an important indicator of a company’s financial strength; but without cash, a company will not be able to survive. 

A business can be profitable and still not have lucrative cash position. It could be maximising sales, but at the same time be in a poor cash flow position because it lacks a robust credit control process. You can mitigate the risks by carrying out customer due diligence prior to agreeing to credit terms. The credit terms could vary according to each client based on their credit rating and your company’s risk appetite. You should also ensure that these credit terms fit with your cash requirements and correspond with the credit terms agreed upon by your vendors.

Stringent cash management could technically gauge your future profits. If you raise funds, for instance, and do not invest in such activities that stream future benefits into the business – eventually the cash would dry up. A smart way for tech businesses to utilise their funds will be by investing it on research and development (R&D) or building scalable processes to boost the growth and the margins. 

In most cases, the profit and loss statement can be used as a barometer to forecast your cash flow. Things like accrued expenses, for instance, could give you an early indication of what buffer is required to retain for a probable future outflow. On the other hand, it could also help to trigger factors like billing your client on time. We have noticed that many businesses accrue income based on the Work in Progress (WIP) principle, without actively invoicing to the client. This disconnect between work performed and billing the client will have an adverse effect on your cash flow.  

It is much easier to “hide” operating problems in your income statement than it is on your cash flow statement. For instance: A manufacturing, retail and wholesale firm would require working capital in advance to support future sales. Although the margins are recognised over the period of sales, the business expends cash on the materials and its distribution immediately. Another example would be debt financing: the repayment of the principal of a finance loan position impacts a company’s cash balance but not its profits. 

Take-away: At AcceleratingCFO, we encourage companies to harness the power of financial data to ensure that their controls are effective in achieving short term goals and objectives. You should constantly evaluate your company’s profitability and cash health. But, also ask yourself the hard questions: Why is the profit too high this month, but my cash looks unfavourable? Or vice versa. Can I bridge the gap between profit and cash by understanding the reconciling items between them both?

Contact us with questions.

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