Cash in th Bank - Profitability

Warning: Cash in the Bank Doesn’t Mean that Your Business is Profitable

Having cash in the bank is essential to manage ongoing expenses and business transactions. But, sometimes the bank account balance can create a false sense of security for business owners. If you are evaluating whether your company is profitable, then you need to consider much more than just the amount of money that is in your account.

Here at Easier Accounting, we are working hard to help our clients make wise decisions based on the true financial picture for the company. Our team can help you look at the bigger picture so that you can understand the real profitability of your company.

Changes in Your Cash Position

There are many things that can influence your bank account balance. In fact, it is common for businesses to have large fluctuations in their cash position throughout the month. When a large deposit comes in from a big contract, then the balance increases for a little while. But, you need to remember that the money is often already spoken for… it needs to be used for payroll, taxes, overhead expenses, inventory replenishment, and more.

Money in the bank doesn’t show the whole picture of the payments that will be due. It is essential that you maintain the balance that is needed so that those payments will clear when they come through.

Watch the bank balances throughout the month, and you will see the natural fluctuations that occur due to normal business activities. Understanding these trends can help you prepare for the future. It is also important that you work closely with your accounting team to evaluate your profit and loss statement and other reports.

Making Wise Financial Decisions

One of the common problems of having a lot of cash in the bank is that business owners mistakenly think that they can increase their spending. Landing a large contract can create a false sense of security, and sometimes people go out and spend money that is needed for essential overhead expenses.

For example, just because there is a sizable balance in the account, doesn’t mean that you can spend thousands of dollars on new computer equipment. If that money is needed for tax payments, then you might be dealing with a hard situation when the taxes are due. Talk to your accountant before you rush out to spend money on office furniture, company parties, and other things that aren’t essential.

Once you understand the anticipated expenses and you can see the way the cash will flow throughout the month, then you can start making decisions about larger expenses.

The Two-Way Flow of Money

As a business owner, it is exciting to see the money coming in, and it can sometimes be stressful to see the expenses that need to be paid. It takes money to earn money! Investing in great employees, high-quality inventory, and other important expenses will create a situation where you can increase your revenue and maximize profits. As money flows in, it will also flow out.

So, you shouldn’t be opposed to spending money. Instead, you need to plan to be sure that the money will be available when it is needed. Cashflow is an essential part of business management. If the cash isn’t available, then you could be facing big problems in the future. Eventually, cash flow problems could lead to the demise of your company. It’s not about what you make… it’s about what you keep!

A good accounting team will look ahead at anticipated expenses to ensure that you are prepared for the future. This financial guidance can be a valuable way to set your company up for future success.

How Profitable is Your Company?

Landing a big client or having a successful sale will boost the balance in your account. Then, you also need to consider the other side of the cash flow: the money that needs to be spent on essential costs for you to stay in business. You can’t count every penny that comes into the account as profit.

Profitability happens when the outflow of money is less than the amount of money that is coming in. Regular bookkeeping practices can track these transactions, helping you compare the money that is coming and going. These financial services will balance both sides of the story, and the difference will show a clear picture of the profitability of your company.

Without regular financial tracking and evaluation, it is impossible to have a full understanding of the success of your business. These ongoing bookkeeping and accounting tasks are essential so that you can see if your efforts are paying off.

Simple Steps to Boost Profitability

If you talk to your accountant and find out that your business isn’t as profitable as you want, then you might consider the benefit of making changes to boost profitability. Here are a few effective strategies to help:

  • Reach Out to Past Customers: Your old customer files are the source of gold that you need to boost revenue. These people have shown interested in the products and services that you offer. So, you can get a good ROI with your marketing budget by reactivating people who have purchased in the past. Send an email or a postcard to invite people to come back. Consider offering a promotion or discount to get people in the door again.
  • Take a Hard Look at Expenses: The money that you are spending could be bleeding the company dry if the expenses are unnecessary. Take time to evaluate every transaction to see if it is essential to keep your business going. If possible, decrease the amount of money that you are spending each month to maximize the money that stays in the bank.
  • Raise Your Prices: Look at the per-unit cost to see if your prices are covering the necessary expenses. Once you factor in overhead costs, production expenses, and more, then you might see that your prices are too low. A small increase in pricing could help to cover the gap and boost the profitability of each sale. But, there is a limit to how much you can increase the pricing of your products and services. Research your competitors to see what the market can bear.
  • Understand Net Profit: Talk to your accounting team to know the amount of money that is needed to support the business every month. This figure is the essential gross revenue to ensure that you aren’t going into debt. Then, look at the incremental effort that is needed to boost net profit.
  • Be Deliberate with Financial Decisions: Too often, business owners rush into a financial decision without evaluating the overall picture. Even if you are busy or you are on a tight timeframe, it is essential that you take a moment to understand the financial health of your company. These financial decisions are the incremental factors that influence future growth and stability within your business.
  • Build an Emergency Cash Account: If an emergency happens, do you have the cash available to pay for the expenses? Instead of pulling out the credit cards, it is helpful to have a backup account with emergency funds. This strategy helps you avoid debt so that you can minimize unnecessary interest costs.

What Should You Do if the Business isn’t Profitable?

There are some tough decisions that need to be made if your company isn’t profitable. Instead of jumping to conclusions that you need to close the doors, look at other options that could rejuvenate your company success.

The most important thing that you can do is ensure that you have the support of experienced financial professionals. You shouldn’t be making these big decisions without leaning on someone who understands the nuances of business growth and development.

If there are possibilities to pull the company out of a tailspin and make it profitable, then you need to look at options to generate cash to carry you through. Evaluate the numbers to see if the Return on Investment is a bigger opportunity compared to taking on the expense of debt.

Instead of giving up equity in the company, consider taking a loan. This decision might be the right answer so that you can prevent a loss of sales and solidify future growth of the company. You need to evaluate the cost of interest, the payments that need to be met, and other associated expenses to see if the investment will pay off in the future. Sometimes, a calculated investment can go a long way to turn the company around.

Schedule a Consultation with an Experienced Small Business Accountant

Do you have more questions about the financial health of your company? Our team is always available to help with anything that you need! We invite you to contact us to schedule a consultation so that you can learn more about the best options to help your company grow.

Easier Accounting is here for you! We are experienced in all types of small business accounting services, and we would love to see how our services can complement the growth of your company. Call to learn more: (888) 620-0770

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