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Business Financials – Do you make Profit.. but have no Cash!

images/BusinessFinancials.jpgLike many businesses, does your company have a profit but no cash to pay its bills? And what does it mean when accountants say “Profit is not Cash”?

If your business has cash sales (records are in cash accounting) profit will usually correlate closely to the actual cash you have.

But if in your business you invoice (accrual accounting) clients for goods and services, the timing of when customers pay has an effect on the cash the business actually has.

We know not everyone pays on time, but if they did you would have regular cash flow, and only be delayed by the initial terms at the beginning eg 7 days, 30 days. Regular payments will mean regular flow of money to cover your expenses.

What if clients are late paying? Then the debtors on your balance sheet will grow (that is where the invoice “waits” for payment) until the client pays.

As an example, in our previous post explaining Profit and Loss, see HERE we gave an example of Profit and Loss resulting in $15,000 profit.

images/bus-profit-loss-diagram.jpg

But what if you were only paid half of the sales at the end of the period (which is more close to reality – eg most pay the next month or two…)

Sales (invoices)                                 $100,000

But only paid (actual cash)                 $50,000

Which goes to bank (in assets)

Net Left                                                    $50,000

Which sits in debtors/receivables (in assets)

Note - PROFIT would be same in accounting terms,

but CASH Profit would be -$35,000 (negative!)

That is, if you still had paid all your bills, you would still have to find $35,000 to pay them – see here

images/bus-cash-profit-diagram.jpg


Need help? Not sure? Call for FREE 30min advice / strategy session today!

Email info@accountkeepingplus.com.au or call 0407 361 596 Australia

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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