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Business Financials – Are you making profit but no cash available?

images/Business Financials3.jpgAre you struggling in business, making profit but no cash available to pay the bills? And what does it mean when accountant’s say “Profit is not Cash?”

If you have cash sales (cash accounting)  profit will usually correlate closely to the actual cash you have. But if 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.

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

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