It’s coming up to the end of the tax year. That means that 2024/25 is just a few days away.

Many years ago I came across a challenge. You started off with a certain amount of cash. I cannot now remember if it was a penny or a pound. The idea behind the challenge was that you had to take your cash pot and buy something. Then you had to sell it for double the amount invested, or as near double as you can. You then take your new cash total and do the same again, and again and again. The idea behind the challenge was that it taught you not only how to trade, but also the value of money. I would also add that it would teach you the importance of cash, as opposed to people owing you the money.

It set me thinking and that is where the challenge comes in. You see, there are a lot of you out there who buy and sell, deliver services etc., and you are busy. But are you making money? If your cash is accumulating the chances are that you are making profits. So, the challenge is, on the 1st day of every month you MUST have more cash in the bank than you did last month at the same time. Can you do that?

It forces you to think about margins, to get your invoicing up to date and so much more.

What’s the prize? You build a successful profitable business and you have money to invest in building your business still further. That, to me, is a pretty significant prize.
Now, if cash is such an important measure, why do accountants bang on about profit? After all, there are plenty of businesses that make profits and still go bust. Well, you see, cash and profit are related, but they are different. Think of profit as cash flowing into your business and losses as cash flowing out. In the normal ebb and flow of business, cash goes in and out and balances go up and down, but at the end of the day you need more cash coming in than goes out. If your accounts show you are consistently making profits, you should be left with surplus cash at the end of the day. You have created new cash by the mere act of trading. But, if your financial commitments (loan repayments etc.) are too high or you need expensive equipment, these will go off with the cash from trading.

Anyway, back to the challenge. If your bank balance is going up when measured on the first day of every month, you will almost certainly be making decent profits. That of course will necessitate paying more tax at some point, so make allowances for that. The tax will only be payable in the following accounting period, so don’t go spending what you have just now without making some provision for the tax.

I have found that people do this in various ways. Some forget about the tax. When we tell them what tax they have to pay, they cannot understand how it can be that much, when they do not have any spare cash. The reason that they do not have any spare cash is because they spent it, quite possibly in the business, when they had spare cash in the bank. I have also seen some people who will estimate their tax for the year and transfer that amount into a separate bank account every month. What about putting a percentage of cash received each month into a separate account? There are various ways to do it.

Now, if you are flat out busy and not accumulating cash what does that mean? It means that you are in busyness, not business. You are immersed in the functions of trade and not focusing on the business.

There is a quote I came across many years ago. It said that profit was like oxygen or blood for the body. It is not the meaning of life, but without it, there is no life. So, profit is not why you do what you do. There is always a deeper reason why you started your business and why you do what you do. These reasons can be many and varied. But, if you are not making profits, you will not be building cash, and ultimately you have no business, however busy you think you are. You are just a hamster running in a wheel and going nowhere…
Many times, it all comes down to margins and setting realistic prices. Now, I know that this can be tough, because if you price too high, you may not get the sale. I understand this. You can get a huge turnover by being the cheapest, but for what?

It has been said that turnover is vanity, profit is sanity, but cash is reality.

I have spent many years preparing and discussing accounts, determining the profitability or otherwise of businesses. But at the end of the day, the sum of all the accounts of a business from birth to demise, will broadly equal the difference between total cash in during that period, less the total cash out. The relationship between profit and cash is therefore largely just a question of timing.

Time for a challenge?

Alan E Long
The Long Partnership
07770 738770