I am Profitable But Where is My Money?

Posted by on Jan 29, 2013 in Blog

Often I hear a comment from a small business owner that they seem to be profitable but never seem to have any cash. This is often backed up by the profit and loss report which shows the organisation is making a profit. So what is the issue?

Understanding the main reasons why this can occur and then managing your business to resolve the issue and remain solvent is critical.

It is important to understand that your profit and loss statement is used to manage the income and expenses of the organisation, whereas the cash flow report reflects the timing of when you actually receive the income and pay the expenses.

For example, your profit and loss statement may show a good profit as you may have a number of debtors that owe you money. If you don’t manage your debtors well then these amounts can remain outstanding for a long period of time. If you pay your expenses quickly you can find that you will have a significant cash shortage. Hm, there’s that empty wallet again.

Ensuring you have an effective debtor management and collection process is important if you want to keep the cash flowing smoothly throughout the month.

Furthermore, match your payment of expenses to debtors. If your suppliers require payments in 7 or 14 days then your debtors should pay in a similar time frame. Stop allowing them 30 day terms.

If they are late with payments, follow up immediately. Follow this link to a post we did in December titled Cash Flow and Debtors (http://accountsstudio.com.au/newsletters/newsletter/7893035/88470.htm) for more information on these points.

Now can you see why you are profitable on paper but your wallet holds only moths?

You should now see the importance of having a cash flow report prepared as well as the profit and loss report. That’s the best way to keep your eye on what is happening with your finances at any time.

If you don’t receive or use these reports then call us on (02) 9997 5662 so we can assist you.