Cashflow lesson from Jeremy Clarkson’s farm

Mans hands holding some wheat with ripe wheat field behind overlaid with financial graphs.

How to spend your business profits wisely

In my last article, I warned about the dangers of looking at your bank balance too often…

If there’s cash in there, it’s often very tempting to spend it. It’s too easy to mistake “lots of cash” for “lots of profit,” when that money is actually already committed elsewhere –  to pay bills, for payroll, to invest or to settle debt.

And sometimes, it’s too easy to spend this money freely, even when that money is profit.

Since writing that article, I came across a brilliant example…

Have you watched the third season of Clarkson’s Farm, on Amazon Prime?

In this series, Jeremy Clarkson makes a bet with his farm manager, Kaleb, around who can generate more revenue from their farming activities.

I won’t ruin the competition for you – but (slight spoiler ahead… look away now if you don’t want to know!) at the end of the series, the business as a whole does generate a profit.

Kaleb’s reaction is instructive. He immediately suggests spending some of this cash on a celebration at the pub.

At this point, the much more financial savvy consultant, Charlie Ireland, intervenes…

“As you know, farms always demand cash. And we’ve started next year’s cycle. So actually I need all of that [cash] to fund the seed, fertiliser and sprays.”

“What, you need every single penny!?” Jeremy exclaims in disbelief.

“Every single penny,” affirms Charlie.

Pub trip cancelled.

There are two lessons here…

First, as I explained last week, most business owners need a change in mentality when it comes to their cash. How much you have in your account on any given day isn’t important. Just because the money’s there doesn’t mean you can spend it! It may already be committed elsewhere, effectively spent.

Meanwhile, how the money moves through your business over time – literally, your cashflow – is critical.

When does money come into your business? When does it get spent? Are there periods when you’re low on cash – even if you’re profitable? And when you spend £1, how long does it take until you see that money back into your account?

These kinds of questions help you understand when you can spend cash and when you can’t.

That’s why tracking cashflow is so essential.

Second, when you generate cash, do you know what it’s for? Quite literally, what is the purpose of that cash?

It might sound obvious, but it really isn’t.

Going back to Clarkson’s farm, Kaleb thought the cash was to pay the owner – he took it for granted that Jeremy Clarkson could spend it on himself and on his team. Meanwhile, consultant Charlie Ireland thought it was to invest in the business’s future.

It could also be used to build resilience within the business, as reserves.

You can’t actually make those decisions, though, until you are certain that the business is generating cash, know exactly how much, and understand how this ebbs and flows over time.

So again, cashflow is key.

Is this an area where you need help? Here at Insight Associates, we help companies track and manage their cashflow as part of our Outsourced Financial Management service.

We can give you visibility of what your cash situation might be in a week, month or three months’ time…

…So you don’t have cash surprises…

…Can forecast when you might be low on cash, and work to plug the gap ahead of time…

…And can make more informed choices about when you can spend money, and how much.

With all this in place, you will feel much more confident about your financial decisions – and be able to grow your company faster and more profitably.

If that’s the kind of result you want, please get in touch today. Simply email garry@insightassociates.co.uk or call us on 01279 647 447 to find out more about how we can help you.

Warmly,

Garry

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In this blog archive our Managing Director, Garry Mumford simplifies all things financial and shares with us a lifetime of practical financial business advice.

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