How to increase profit in the business?

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 Comparing Cash Flow and Profit to increase the money in hand.

Cash is essential to the day-to-day operations of a business. Especially for growing businesses, good financial management can lead to business success.

It is important to remember that cash does not mean profit. Many businesses fail to do this not because they are unprofitable, but because they have no cash. Your income may not equal income in your financial statements for a number of reasons:
  • Your business may have recorded sales revenue but not yet accepted payments because customers paid on credit.
  • The income statement does not list all the costs you have to pay because costs are only included when inventory is closed.
  • The income statement also records its cost (via depreciation) over the life of the asset, but you cannot pay for it.

Cash Flow Cycle 

In a normal business, every business has a cash cycle, which shows how cash flows in and out of the business. You use cash to buy products and pay vendors, and you receive cash from customers after the sale. The timing of this process is important - you need to sell your products and get paid fast enough to cover your costs. 

The length and health of your cash cycle depends on three important factors: how long it takes for products to sell, how long it takes for customers to pay you, and when your vendors pay you. In most businesses, there is a difference between the time you spend your cash producing a product or service and the time you get paid from your customers.

You need to save extra money so that your business can continue to operate during this time. 

The money required for this is called working capital. Let us examine this relationship in more detail.

When you look at your financial statements, you'll get an idea of ​​the average time of year your business sells products. The day's sales turnover rate helps you calculate that number for your business.

If your business does not have inventory, you can use Work In Progress days or exclude them from the calculation as appropriate. If you're selling on credit, your credit days represent the average time it takes your customers to pay you. Also known as due date and payment date. Although you have payment terms, the reality may be different when you review your documents. Knowing the real numbers is essential when calculating cash flow.

Both of these situations will increase the time it takes for money to return to your business, but there are also suppliers who want to commit to your loan. You can get an idea of ​​the average time it takes you to pay your bills by calculating the days to pay (also known as days for debtors). As your business grows, you can reduce the working capital you need by understanding and streamlining your financial cycle. You can improve cycle time by selling inventory faster, shortening customer payment times, or negotiating better credit terms with suppliers.

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