Top 5 reasons why I have profit but no money in the bank
It’s a great day when you get your year-end financial statements. Your business is booming, and there is a huge profit! You're almost about to get the celebratory champers out when suddenly you realise that beautiful fat profit is not in fact in your bank account! So where did your money go?? We’ve outlined the top five reasons why you’ve made a ‘Profit’, but it doesn’t quite line up to what’s in the bank…
ONE…
Drawings – You’re taking drawings (money from the bank to spend personally). Drawings are not a taxable expense and therefore do not affect your profit. So, if you are looking for the fraudster who stole all your profits, it may in fact be yourself!
TWO…
Loan payments – You may have loan or finance payments to make, however the principal repayments are not an expense either! (Only the interest is deductible). And once again the principal payments do not reduce how much profit you make. They drain your cash in the bank but not your profit. This is because they are considered a capital expense.
THREE…
Accounts Receivable – creditors/invoices owed to you. The profit in your financial statements includes income that may not have been paid to you yet, because it includes your receivables. This means if customers take their sweet time paying you, your bank account might not look too flash despite your profits. On the other hand, if customers pay you faster this will increase how much money you have in the bank. A lot of businesses are reducing their terms of trade so that they receive funds sooner.
FOUR…
Inventory/stock held – If you hold onto stock in your business, then this stock is tying up funds in your bank account. If you have your reorder point correct, then the stock you hold should turn into cash quickly. However, having stock on hand for a long time can increase obsolete stock, waste, or reduce how much the stock is worth, therefore all decreasing the cash you’ll receive once sold.
FIVE…
Timing. Perhaps the simplest reason, but not always front of mind, is timing! When we look at our profit we are always looking backwards at a previous period of time, a time that’s been and gone, hence although you may have had an awesome profit in the period under scrutiny, you may be in a completely different kettle of fish now.
