Where is my profit disappearing too ... I have no cash?
John Woolnough
Chartered Accountant - Transformation - CASC & Gift Aid - Football Club Owner/Chairman - Football Coach - Charity Trustee
I hear this a lot, and I mean A LOT on social media and in passing conversations from small business owners wanting to know why their Profit and Loss report shows that they made money, yet they don’t actually have that money in the bank.
Most small business owners either want to ask this question, but are afraid of appearing silly or ignorant or ask this question to what seems like the right people, but aren’t.
They usually don’t get an answer from their bookkeeper because he or she just doesn’t know, and their Accountant is just too busy wading through compliance work that adds no value to their clients.
There is often a confusion of the link between profit and cashflow, the issue is that many small business owners really look at and comprehend their profit and loss. The problem here is that it only tells part of the story.
To fully understand cashflow we have to understand the activity related to the money you owe people, that people owe you, or that you personally put in or take out of the business. Sometimes this activity can be pretty significant and it is the key to understanding how your profit relates to your cash flow.
The Balance Sheet is one of the most important documents in your business (yes… even more important than your Profit and Loss Statement). Your Balance Sheet will tell you what is happening in your business from a cash and financial perspective, and help you understand where your pounds may be.
TIP: If you don’t understand the language or terminology on your Balance Sheet, and it’s just a random mess of numbers, ASK your bookkeeper or accountant to explain it to you. If they are unwilling or unable to do this, then consider changing service providers.
The Balance Sheet is one of the easiest business financial documents to understand, and should be something that can be stepped through, in plain English, to give you clarity and understanding on your business numbers.
So how do we understand the link between profit and cashflow?
There are many areas to consider, in future articles we will look into the following 5 key areas.
- Understand your Debtors Ledger
- Understand your Owners Drawings/Directors Loans
- Review your Inventory Levels
- Understand your Liabilities
- Understand your Creditors Ledger
Once the key areas above are understood the confusion over profit and cash is often removed.
Gerencia de Contabilidad e Impuestos
6 年Just one thing more: you (owner) needs to compare the Balance Sheet btw two periods (months or years) to understand the cash flow, because “the cash is the king”!
Marketing Consultant & Halpin Consulting Fellow (retired), Polymath. Not seeking work.
6 年So few businesses produce a projected cashflow spreadsheet before starting a business. My first business was in horticulture and every crop had a gross margin projection which merged into an annual cashflow projection. Bearing in mind we grew three crops in every greenhouse each year this gave me an incredibly detailed insight into what made money and what didn't... Provided we analysed projected figures against actual. This meant I knew my actual gross margins for every crop I grew and could balance this against labour and machinery projections (max gross margins aren't possible if you have labour it machinery capacity problems). This isn't rocket science if you use spreadsheets and allows you to plan purchases etc to maximise cashflow.
Assisting Business with Financial Direction and Teesside Hospice Trustee
6 年A very common problem and not just with underperforming businesses. Growing profitable businesses can tie up profit in higher stock levels, increased debtors and work in progress. This puts significant pressure on cash flow but there are solutions available to address this issue.