Starting a business is a wild ride with its fair share of ups and downs. One hurdle many new entrepreneurs encounter is the difference between the profits they expected and the hard cash available at the financial year-end. This guide aims to alleviate these concerns by shedding light on where your missing revenue might be hiding.
Possible causes of missing profits
There may be several reasons why your business has shown good performance throughout the year, yet there’s little cash to show for it in the end. Here are a few possible places your profits could be lurking:
- Unsettled debts: Some of your customers might have acquired your products or services without paying yet.
- Inventory: Your profits might be tied up in unsold stock or raw materials, especially if you buy in bulk.
- Asset acquisition: If you’ve purchased new assets like a work vehicle, these expenses are depreciated over several years and not all claimed in the year of purchase.
- Owner withdrawals: Balancing the amount of profit you withdraw from your business for personal use can be tricky.
Navigating financial statements
One of the key components to understanding your financial situation is your profit and loss statement. This document represents your business’s income and expenses over a given period, whether these transactions have been completed or not. This means that sales or purchases made on credit are included, which can create a disparity between your profit figures and actual cash on hand.
Bridging the gap
To bring your financial statements closer to your actual financial situation, regularly review your debtors. Vigilance in following up payment requests and taking action for late payments is essential. Additionally, using a cloud-based accounting system (we recommend Xero) to track transactions in real time can aid in timely decision making.
Dealing with creditors and debtors
Businesses often have customers who pay on credit, as well as suppliers who offer credit for purchases. This can lead to a time lag between the record of transactions and the actual monetary exchange, increasing the figures in your ‘Sales’ and ‘Cost of Goods Sold’ (COGS) categories while your bank account remains stagnant.
COGS represents the direct costs involved in creating or acquiring the goods you sell to customers. This includes the initial inventory, purchases made during a specific period, and the inventory left at the end of that period. Other costs like freight, storage, and factory overheads could also be included.
The role of reinvestment and owner withdrawals
In a bid to expand their operations, businesses often reinvest their profits. This reinvestment could take the form of increased stock, debtors, or capital expenditure. On the other hand, excessive withdrawals by the business owners can restrict growth and deplete cash reserves. It’s essential to set sound budgets for each owner to prevent drawing too much profit.
The Bottom Line
If you’re facing a fiscal year-end with profits but no cash in hand to pay your taxes, don’t panic. Dig deep into your financials to uncover if your cash is tied up in extra stock, debtor accounts, or new assets. Managing a business is a journey, and understanding these financial intricacies will empower you to navigate it better.
Contact us for a deep dive into your financials.