Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsManaging Cash FlowCash and ProfitNow you know that profi t is made from sellingyour goods or services for a price higher thanwhat it costs to make or deliver to yourcustomers. Cash of course is generated fromthese transactions, as well as other activitiesthat the business may undertake (such asselling assets). The key to a successfulbusiness is good profi tability and adequatecash fl ow.This means that if you manage your marginsproperly, your trading should always beprofi table and hence have positive cash fl ow,right? Wrong! A business can be profi table butstill encounter cash fl ow issues. How doesthis happen? Well, it’s all about timing. Profi tof a transaction is calculated when the salesis made. If you are in a business that offersA business can beprofi table but stillhave cash fl owissues. It is importantto implementprocedures in yourbusiness that willensure cash fl ow isappropriatelymanagedHINTCASH DOES NOT EQUALPROFIT!goods or services on credit, then the profi t is generally assessed at the time ofthe sales; however, you may not receive the cash until sometime later.There are two ways in which the transaction can be recorded: either on thecash basis or accrual basis. When working out if your transaction is goingto be profi table, these are probably the questions you will need to answer:• How much will it cost you to buy or make the product, or provide the service(hours paid)?• What is a realistic price that your customer will be willing to pay?• What do your competitors charge for the same or similar products orservices?The next step is to compare the price you will receive with the cost paid, and ifthe price is higher than the cost, the transaction is profitable. Again, let us goback to Adam’s Computer Bags income statement, which we saw in Chapter 1.67Chapter 6 p66-78 Eng.indd 678/15/11 5:02:23 PM