Turnover, profit, and cash flow are three terms that are mixed up by many entrepreneurs. This can sometimes lead to unpleasant surprises. A good understanding of the three terms makes you a better entrepreneur.
1. More Turnover: The Road to Growth
Higher sales seem to be the sacred thing of the entrepreneur. More sales are good, is the adage. But more turnover does not necessarily lead to higher profits. Turnover is the total of sales in a given period. This can be a month, a quarter (for the sales tax declaration) or a year. You can also distinguish between:
gross sales: the total amount of sales, and;
net sales: gross sales minus discounts, compensation and sales taxes.
Turnover growth means that sales are rising and more money is being made. Growth increases the chance of continuity because you are less dependent on a few large clients. The costs usually increase with growth in turnover. You also have to deal with some tipping points, such as when you have to hire additional staff or need extra space. At those times, your turnover needs to grow, if the profit is to stay up to standard. That is why it is significant to formulate a growth strategy and to draw up a liquidity forecast.
Tip! Allow time to distance yourself from the daily routine to reflect on business operations. For example, look for a professional confidant with whom you can discuss the progress of your company in a relaxed atmosphere.
2. The profit
Profit is the amount that you have at the end of the year at the bottom of the line. The most basic definition of profit is ‘net sales less the (operational) costs.’ This is also called the gross profit. If you do not have the operating costs in hand, net sales can grow, while gross profit goes down.
Because you are dealing with things like depreciation, interest payments and (tax) investment schemes, the profit before tax is different from the gross profit. The trick is to keep this taxable profit as low as possible about the gross profit.
3. Cash Flow (it is A King)
Sufficient cash flow is what it is ultimately about. At least in the eyes of your bank. In simple words, it is about the money that comes in and goes out. If more money goes in than the cash flow, then the cash flow is negative. If more money comes in than you spend, the cash flow is positive. So far it is a relatively simple story: the cash flow provides information about your liquidity position.
A cash flow budget is nothing more than a liquidity budget. It offers you an overview of the expected income and expenses. It prevents future surprises. In the budget, you can include the expenses such as the transfer of sales tax, holiday allowance or thirteenth month in the liquidity forecast.
Tip: You can also buy a cash flow forecasting software to control your liquidity budget in a better way!
Better insight: Because you have a good view of your finances, you will not be faced with surprises. You have an idea of the obligations that are waiting and can respond to this in time (instead of running after the facts, where you have to fill holes with new holes).
Collecting peaks and troughs: A liquidity budget provides insight into the peaks in expenditure and the (seasonal) decline in income. So, you are well prepared financially to anticipate the fluctuations in the cash flow.
A true investment plan: With an investment in, for example, a new machine, the bank wants to know whether you can bear the rising costs that go with it. With an investment, it is usually not the purchase costs of the asset, but there is also extra hands and stock. A liquidity budget helps you to substantiate the decision. That can also mean that you come to the insight that you better wait.
Tip! By setting up a cash flow budget, you make the improvement points in the business operations clear. For example, the influence of the average payment term of your debtors on your financial space. The cash flow budget is a prelude to smarter inventory management and the establishment of structured debt management.