ABOUT THE CONTRIBUTOR

Lisa Stoneham
Lisa Stoneham Lisa Stoneham is a qualified accountant and bookkeeper, helping her clients make more money with less effort. Lisa will make sure your numbers are right, so your tax accountant can do your annual tax returns easily and have time to give you strategic advice instead of chasing transaction errors. This means you can work ON your business, make better decisions – and you won’t need to worry about problems with the ATO. Lisa has been managing business numbers since 2005, and in July 2015, she realised her dream to run her own business when she started Straight Forward Accounting, Solutions. She specialise in XERO accounting software because of its ability to provide real time financial access – any time, any where. XERO is a game-changer for small businesses, making them smarter, more agile and more competitive. By helping you make sense of your numbers she enables you to make great decisions about your business. This gives you your time back to work on growing your business.

Lisa Stoneham has written 16 article(s) for us.

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Cash Is Not Only King But Also The Entire Royal Family!

November 25, 2015 | Lisa Stoneham

It is certainly not overstating the truth to say that cash is everything to your business. In a nutshell if you run out of cash that is the end of your business. After all your business cannot survive on love and fresh air alone!

Don’t make the mistake of assuming profit and cash are the same thing and if a business is making a profit then it must have plenty of cash. Entirely different things drive profit and cash and a lack of understanding of this concept results in a lot of businesses going under.

Profit (or Loss) is comprised of the difference between revenue earned and expenses incurred. A business earns revenue when they sell a good or service and issue an invoice to the customer requesting payment by a due date. An expense is incurred when a good or service is purchased from a supplier and the supplier sends an invoice requesting payment for the goods. Cash does not come into the equation until later on when the business receives money from the customer for the goods sold or the business pays the supplier for goods purchased at an earlier point. The time period between an invoice being sent and actual money changing hands can vary greatly.   If a customer takes a long time to pay it can result in pressure being put on the businesses’ cash resources no matter how much revenue is involved in the transaction. This is a major reason why cash cannot be tied to profit.

Another important aspect to take into consideration is the purchase of assets such as stock and machinery. Assets are not included in the Profit and Loss Statement and instead appear in the Balance Sheet. Enormous amounts of cash can tied up in assets and if a business owner was only looking at profit they can quite easily not realise that their cash supplies are rapidly dwindling.

Fortunately it is not all doom and gloom. Knowledge is power and if you can understand the key concepts of cash and profit then you will find it a lot easier to manage your cash flow and avoid disasters before they happen. Make sure you don’t become a statistic!

Next month we will continue our series of blog posts on cash flow where we will uncover the key factors that affect the cash flow of your business.

How do you manage cash in your business? Do you monitor your cash flow closely or do you only look at your Profit and Loss Statement?

Comment below – I would love to hear your thoughts!