The 5 minute free cash calc that every SME owner should do.
You have to know the difference between profit and cash in your business. Cash is what keeps you afloat not profit. Businesses don’t always fail when they are unprofitable but they always fail when they run out of cash.
Whilst this is mainly a business hack for SME owners it’s actually well worth doing something like this for your personal finances too, but we can cover that another time! Knowing your free cash level guides your decision making, unveils your true available net profit and cash position and let’s you see into your financial future.
So all savvy SME’s must know how much cash, net of all expenses and future bills resides in their business. If your business shut up shop today, would you know how much money would be left? You need to know. Here’s a quick hypothetical easy way to do it. Let’s assume you are a limited company SME registered for vat for the purposes of this:
Bank Balances: £9,000
Petty cash: £1,000
Money owed to suppliers: £2,000
Money owed to you: £3,000
Net Vat owed or due: -£500
Corporation tax previous year due: £4,500
Corp tax calc as of today: £500
Free cash position: £5,500
Typical monthly overhead: £2,500
Add and subtract all of this and you end up with £5,500 which means you have free cash to cover just over 2 months trading if you don’t make any more sales or incur any more costs. 2 months and you’re out of business.
I regularly see SME owners running their business off their bank statements which has nothing to do with your profit or your cash. The calculation above shows you where your cash is and how much you’ve really got available. Looking at your SME there’s quite a lot of things around this topic that can hep you. You could for example set up a second bank account to move your vat and corporation tax liabilities into. That’s not a bad idea. I find that when you look at a low bank balance there is a certain motivation that ensues. So moving your future tax liabilities psychologically works for many SME owners.
An important caveat here is that you will get paid what you are owed. I’m assuming you’re running a limited company too, otherwise there’s no corporation tax and you need to calculate your personal tax differently. Everything else provides a good guide. Try it yourself?
It’s is a fundamentally important calculation to do monthly in any SME.
I believe that it doesn’t matter how bad or good your financial position is. You just need to know it. Once you know it you can decide what to do. Not knowing it is the classic head in the sand scenario, and whilst your head is in the sand everyone can, and will, kick your arse.