Reply With QuoteWithout knowing in detail what's going on, I'd say there's some issues around the net trade cycle of the business...
how when the company accounts are showing a gp of £120k ytd that our employer has a severe cashflow problem? We challenged him on this today and what we were led to believe was a sound business suddenly feels a little flaky. We left great jobs to come and do what we do now but were drawn by the lure of building on existing success. To find out a year after we changed jobs is a bit of a shock. We did have access to the accounts before we came but it seems some things don't appear too straight forward.
Any ideas would be a great help thanks.
Without knowing in detail what's going on, I'd say there's some issues around the net trade cycle of the business...
Put simply: cash is the blood of a business, paper profit is no good if there's no cash in the bank to pay suppliers, wages and, quite often a company breaker, taxes. Very easy to not leave enough in the kitty through bad management e.g. poor debt control, and common for owners to take out too much without considering the business cash needs.
I'm not an accountant but I do run a small business and after many years working for large multinationals the problems of cash flow initially came as a great shock to me. One of the usual problems and certainly one that we regularly have is the gap between payments and receivables, payments being the money you pay out (in our case mostly salaries) and receivables being the money clients pay you for the work you've done. The usual problem is that you have to pay the wages every month but clients drag their heels in paying your invoices. Big corporate clients want to pay you on 60 - 90 day terms but you have to pay salaries every 30 days; too many clients paying you on extended terms and you can easily be profitable but are stuck with a cash flow problem ie the money's there on paper but it's not in your bank. Usual recourse is to rely on bank reserves (if you have them) or ask for an overdraft (if you can get one) or sometimes the owners just have to dig into their own pockets (Directors loan) to cover things. Factor in a big VAT bill plus rent and rates paid quarterly in advance and you can easily have a serious cash flow problem.
A good accountant should keep you wise to any impending problem via a cash flow forecast and sensible directors should be making some sort of provision to cover things, a common practise is chasing for earlier/on time payments or factoring your invoices, effectively selling them to a third party at a discount in return for money now. Difficult to be more specific without knowing some company details but I hope things work out OK for you and your colleagues.
regards
grant
Cheers chaps. A question to follow on then is how come when our clients bills are payable on departure (we run a guest house) we have this problem? There aren't many if any clients with 30, 60 or 90 day terms. I am beginning to worry about this being bad debt/credit management and the owner feeding to richly at the trough.
Think you've answered your own question... "payment at the counter" income like that really should make cashflow foolproof, so the fault likely lies on the outgoing side e.g. big lag/big number creditor such as HMRC, or the owner draining funds. Doesn't sound promising TBH.
It's quite easy, you have high levels of stock and you've paid proforma invoices for future stock; that's where all your profit is.
Eddie
Whole chunks of my life come under the heading "it seemed like a good idea at the time".
Don't forget that the owner might be making an operating profit, but is that before or after debt and tax payments?Originally Posted by Puntsdog
Cash is a fact, profit is an opinion.
They also could have been spanking the cash out of it based on the projected profit do the owners have narcissistic traits.
Gross profit doesn't mean very much, (it doesn't take account of overheads for example, which may be substantial) and the figure of £120k is pretty meaningless in isolation anyway. For example, it would have completely different implications if turnover was £200k to if it was £2.5m.
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