What is this?
Profit & loss statements are the foundation of financial reporting on every business. However they are incomplete as standalone reports.
This is because they declare your revenue (sometimes referred to as ‘recognising the revenue’) usually either
- when the service is booked / product ordered
- when the service takes place / customer receives the product
Neither is necessarily when payment is received.
- You might have been paid in advance, whether in part or in full (e.g. deposits)
- You might have agreed to be paid later (often referred to as a ‘deferred payment’)
This applies equally to bills you need to pay your own suppliers – you could pay before, or after you incur the cost of that product/service.
Because it’s critically important to track and forecast how much cash you have, the cash flow statement exists to do this in conjunction with the profit & loss statement.
How does it work?
Cash flow statements are as easy as 1-2-3, comprising exactly that number of main components:
1. Cash in: all monies in, whether from the opening balance that you start with, sales, loans or raiding the piggy bank you’ve been putting pound coins in since you were at junior school.
2. Cash out: all monies out, whether because of bills or you’ve decided to treat yourself to dinner out
3. Net balance: equal to ‘all cash in’ minus ‘all cash out’
So obvious, you’d be forgiven for asking, “How does this add to what I know?“
The devil is in the detail. Even the smallest and simplest business setup quickly develops into many different incidences of ‘cash in’ and ‘cash out’, each driven by its own circumstances and events, many of them without your presence or understanding.
It soon becomes impossible to stay on top of everything through memory and knowledge of your business alone.
A cashflow statement reduces everything to one figure at any moment in time (your net balance).
How is this useful to me?
Cash is king
In the long term, it’s important that you make a profit – and this often necessitates making a loss in the early days. This is where the profit and loss statement is invaluable in evaluating whether the opportunity is big enough for your objectives.
But on a day by day basis, it’s even more important that you don’t run out of cash.
Unfortunately, a common feature of small business cash flow is that you do not have a regular income. Some months will record higher income than others, especially if you offer seasonal products and services.
Running out of cash could eventually lead to any number of severe consequences:
- your landlord locks you out of your salon / clinic
- your staff can’t come to work because they haven’t been paid
- essential services like telephones, internet, or electricity are cut
- HMRC issue a winding up order because of unpaid taxes
Most business observers agree that cash, or rather the lack of it, is what stops more professional ventures than anything else (some estimates put the figure at 70% of startup failures being due to cashflow issues).
This is why a saying popular with seasoned business owners and the long term self employed is, cash is king.
Cash flow statements tell you when you will be short, so you can do something about it now
Landlords, suppliers, agents, business folk of all description, tend to have a more sympathetic ear if you talk to them well in advance of not being able to pay them on time. If they are assured you will make it good, then it’s in their interests to help you succeed.
Meanwhile, banks and other lenders are much easier to deal with if you’re trying to borrow money for a future need. If you’re desperate for cash now, then that leaves you in a very weakened negotiating situation.
Want to really get into the detail?
- How to prepare a cash flow statement, and what to do with the results
- 9 tips from the experts for beating the #1 killer of small busineseses
- Cash flow – how it works to keep your business afloat
- Why you need a cash flow forecast
Example cashflow statements (with downloadable templates)
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Other useful Minutes
Bite sized guides to concepts that could help you attract clients, reduce costs, or run your wellness practise more efficiently:
- A few minutes to understand… business systems
- … Key Performance Indicators (KPI’s)
- … the marketing funnel
- … opportunity cost
- … the Planning Principle
- … profit & loss (P&L)