Category Archives: Profit and cash flow

Business Strategy – sales information

Sales figures are probably the most closely scrutinised of any business information. Timely reaction to any changing sales environment is essential in order to optimize sales and profits. Good analysis will lead to good strategy and I’ve listed below some of the points to consider.

Sales by product or service

  • Which product or service is most popular in this period?
    • Analyse reason for increase/ decreased sales,
      • Have you began or ceased a marketing campaign?
      • Has the economic, social or natural environment changed so as to be more/less conducive to such sales?
      • Is changed demand due to temporary circumstances or permanent?
      • Has your position relative to competitors altered e.g. cheaper, better quality?
      • Is one product or service complementary to the other e.g. mobile phone and phone case/ear phones?
      • Is one product replacing another e.g. notebook/laptops?
      • What are the reasons that sales mix now differs from your original prediction (forecast)? 

Strategy Options

Do you need to invest in a marketing campaign, allocate more resources to certain products or cease providing unpopular services? Or would a new or different offer revive sales?

Sales by customer  

  • Who are your best customers?
    • What products/services are your best customers buying?
    • Are they buying more or less than in previous periods?
    • Are your customers concentrated in one industry or geographical area?
    • Are you becoming too dependent upon one or a group of customers? 

Strategy Options

If a good customer hasn’t purchased a certain product recently maybe they need a nudge? Or possibly they are buying elsewhere and you need to know why this has happened. If you sell a lot to customers in one industry it might be worth contacting non-customers also in that industry. Too much dependence on one customer may also be a risk if you lose that one customer.


Sales by period

This information is best analysed over several years but within a period you may be able to divine patterns of expenditure.

  • What are the seasonal patterns of sales of different products/services over the year?
    • Are there specific months when you do or do not sell specific products?
    • Do your sales relate to specific promotional activity?
    • Do your sales vary with certain events eg national budgets, rain, Easter?
    • Do some product sales show unusual peaks and troughs? 

Strategy Options

If know you do not sell jumpers between June and September perhaps stock swimwear. Perhaps some sales are influenced by non-company publicity such as a public health campaign leading to more fruit sales. Alcohol or petrol sales often increase before budgets. Being aware means that you can be prepared for changes in demand and not miss that additional sale.


Of course sales revenue is very important but it is as important to ensure that all your sales are profitable. High sales could be the result of pricing so low that you are making a loss on a product. But that is a subject for another article.

Relevant measures will vary with the business. I’d be interested to know which particular sales measures you have found most useful.

Cash flow – modelling

In my previous articles I explained the importance of cash flow for both stable and growing businesses. I have been asked to provide more detail about the mechanics of analysing cash movements.

First a quick comment about forecasting… forecasts will always be wrong! This is very well explained on this website which covers forecasting strategy and requirements.


Cash flow forecasts are more susceptible to error because they are an estimate based upon an estimate. That is, you first have to forecast (estimate) your future trading then estimate the periods for the resulting cash flows. For example, your terms of payment may be 30 days but some customers may take 40 days, or query a payment so that many of your cash receipts will occur later than your payment terms.

If the forecast will be wrong why bother?

In most cases any finance provider will expect to see a cash flow forecast; but if you are obtaining finance you need to have at least an idea of what levels and when finance might be required. In my experience it can be surprising how quickly a business can go from a large cash surplus to overdraft. Understanding how the elements of your business behave in cash terms is also a useful exercise.

Starting from the premise that you have a trading forecast and details of both revenue and capital costs, I’m listing below some timings to consider when constructing your forecast.

Sales Revenue

Timings of cash received will usually be different from the sales forecast which is based upon when a sale is made. So consider:-

  • Deposits
  • Payments in advance
  • Easy monthly payments
  • Retentions

You may have defined payment terms but realistically:-

  • Does (say) a major customer take a longer credit period?
  • How often do you experience slow payers or queries delaying payments?
  • What is your average rate of bad debts?


You should have more certainty about when you pay your costs but remember:-

  • Purchases are on whatever credit terms your supplier agrees.
  • Some annual costs may be shown in your accounts as incurred throughout the year although payable once a year; for example subscriptions or insurances.
  • Capital costs such as vehicles, equipment or furniture do not appear in your profit and loss account  but may be ‘one-off’ or lease payments over a period.
  • Depreciation does appear in your P&L account but is not a cash flow.

Salaries and wages

  • Wages and salaries are usually payable a week or month in arrears and net of income tax (PAYE) and national insurance.
  • PAYE and national insurance is payable in the following month but remember to add employers national insurance.
  • Cars and other benefits paid to employers attract an annual NIC charge.


There are many different VAT schemes, but assuming a VAT scheme used by the majority of businesses consider:-

  • On your sales you will receive VAT at 20% (UK) with the remittance from customer.
  • When you pay your customer you will pay VAT at 20% (UK) on most costs.
  • Each quarter you will then pay to HMRC the sales less cost VAT. However this is required to be calculated as due at the invoice date; so  VAT on your return will be payable/recoverable regardless of when is payment actually received/made. 

Other Taxes

  • If your company is profitable remember you will usually have company tax payments. These can be substantial.
  • If you import goods you may be required to pay duty when importing your goods.
  • Some payments made or received may have tax deducted at source. 

This might all sound quite complex, but once the costs/revenues and timings are modeled you can then quickly run various scenarios to assess what and when your company might have funding needs.

If you have any questions you can leave a comment below or my contact details are here. Find out about me here.

Cash flow, profit and your growing business

In my last article I illustrated why a company with steady profitable trading may still need an overdraft i.e. have profits but no cash. In this article I’ll illustrate why a rapidly growing company which is increasing its sales substantially can have an even greater cash flow problem!

Expanding Ltd has the same costs profile, sales margins and credit periods as Stable Ltd here. The only difference is that its sales and consequent profits are increasing substantially each month. As with Stable simplified timings are:

  • Expenses e.g. stock, salary costs are paid for at the end of the month a sale is made
  • Sales invoices are issued at that month-end with a strict 40 day credit period
  • Profit is a steady  25% of sales
  • The period begins with no cash in the bank

Expanding Ltd.’s increasing sales and profits are illustrated by the graph and table below:



In six months Expanding Ltd earns a profit of £2,444, this is £944 more than Stable. However at the end of the period Expanding has a much higher overdraft owing the bank £1,706 more than Stable!  See the cash profile below:



Looking over a 12 month period (not illustrated) Expanding earns a profit of more than £11,500 but has an overdraft of £6,200. So while Stable earns annual profits of £3,000 and has a healthy cash position at year-end Expanding is nearly three times as profitable but still significantly overdrawn.

The reason Expanding has far less cash can be seen in the timing differences; costs are paid several months ahead of receiving revenues. Because sales are increasing the costs increase before increased revenues are received. This leads to the requirement for a much larger overdraft.

The above illustrates a phenomenon termed ‘overtrading’. If a business has not planned its cash flow it can find that despite being very profitable it has run out of funding in the form of loans or overdrafts and for that reason can no longer continue to trade. Profitable businesses can go bust purely because of lack of cash.

If you plan to expand your business substantially do not assume that profitability will result in sufficient cash. There are a number of strategies to ensure that cash flow does not cause problems but first you must be aware and plan for cash as well as profit.

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Why profit may not equal cash in the bank

One of the most frequent questions I have been asked by owners of profitable businesses is “where is the cash?” They’ve been trading profitably for a long period but still have a large overdraft! Why?

Some timing differences are understood, expenses are generally incurred before the sales can be made. However there is often an additional lag because accounts record the sales invoiced and expenses incurred in a given period. That this measure of trading does not equate to cash movements can best be illustrated graphically.

A very simplified example shows Stable Ltd

  • Expenses e.g. stock, salary costs are paid for at the end of the month a sale is made
  • Sales invoices are issued at month-end with a strict 40 day credit period
  • The period begins with no cash in the bank

Stable Ltd is making a steady profit (green bars) as shown by the graph and table below:

Graph Income ,Expenses, Profit

 So – steady profits – no problem? Until we look at the cash flow as illustrated in the graph below:  


Stables’ cash flows are negative. The green bars show overdraft (negative cash) increasing then only gradually diminishing despite the (positive) profit. Stable raises and records the sales invoices on 31 January (£1,000) but does not receive the cash until early March. Meanwhile costs such as salaries and stock have to be paid in January.

Although not illustrated, despite having accumulated profits of £2,000, Stable does not have positive cash until September at which point the balance is £250.

It’s important then, to understand and model your cash timings. In the example above, if Stable had an overdraft limit of £750, despite trading profitably it would soon have faced difficulties.