The Best Use of Your Financial Statements – Boosting Profitability and Positive Cash Flow
For most small companies, the important points to come out of financial statement analysis are ways to boost profits and improve cash flow. Since the two usually go hand in hand, a positive change in one can bring the same in the other; however, there are times when focusing solely on one of these issues can bring about a negative change in the other. A prime example of profits and cash flow moving in opposite directions is when a business suddenly begins offering credit terms to customers; this often triggers an immediate increase in sales and therefore profits, but it leads to a decrease in cash inflow.
As a business owner, you have more control over your cash outflows and your expenses than you do over your inflows and revenues. The easiest way to minimize cash outflow and expenditures is to cut operating expenses wherever possible. The more you can do that, the more cash you’ll have to work with. That “extra” cash can be used to pay down high-interest debt (such as credit card bills with ongoing balances) more quickly; that, in turn, cuts down both your interest expense and cash outflow going forward, which will eventually improve both your profitability and cash situation.
If your company doesn’t have outstanding credit card debt to deal with, make extra payments on your highest-interest loans when you find yourself with cash on hand. The sooner those loans are paid off, the less interest you’ll pay overall, improving both your cash flow and your bottom line.
Other steps you can take to improve cash flow include extending accounts payable as far as possible while tightening the reins on accounts receivable. Talk to your vendors about adding some time to your credit terms, and use every day they give you. At the same time, get tough with your customers about paying on time. To boost your incoming cash, you can offer small early payment discounts to your customers. Although that may seem counterproductive when you’re trying to increase profits, it may actually have the effect you’re going for. Early payment discounts encourage customers to pay you more quickly, and for them it has the effect of cutting costs, which can encourage them to buy more from you.