Have you ever been in a meeting with your accountant, hearing how much profit you’ve made and being congratulated on a lift in performance, but in the back of your mind you’re wondering where the cash is and how you’re going to make payroll tomorrow?

Don’t worry, you’re not alone!

The problem is that cash is simply never going to be the same as profit. Here’s why:

1. Tax payments.
Even if your profit figure is reported as after tax, the timing of those tax payments is very different to what’s in your Profit and Loss Report. For example, you may have paid too much tax and be due a refund; or maybe you’ve underpaid and have to pay more.

2. Asset purchases.
These drain your cashflow but are investments, not expenses. You can’t buy a new car at the end of a good year to drop your profit! Asset purchases go onto your Balance Sheet, not your Profit and Loss Report.

3. Asset sales.
These give you cashflow but aren’t treated as income. They reduce your investments in assets on your Balance Sheet.

4. Drawings to owners.
Funds that you take for yourself to live off come out of the investment you’ve made in the business. Your living costs aren’t a business expense, so they don’t reduce your profit.

5. Increases / decreases in debtors.
Your Profit and Loss Report records what you’ve invoiced to your customers in any given period, NOT what you’ve collected. If there’s a build up in debtors, you’ll reduce your cash as you’re still going to have to pay for the costs incurred in making those sales. The great news is that, if you reduce your debtors balance by collecting your debtors faster, you increase your cash but pay no more tax.

6. Increases / decreases in stock or work in progress.
Your Profit and Loss Report records what inventory or work in progress has been consumed in the sales you’ve made. If your inventory increases and hasn’t yet been sold, you’ve used up your cash but not made any difference to your profit for that period.

7. Increases / decreases in creditors.
Just as with debtors, your Profit and Loss Report records the expenses you’ve incurred during the period. If you haven’t yet paid some of these expenses, your profit will be lower but your cash will be higher. Of course, not paying your suppliers is not a strategy you can adopt to increase your cashflow!

8. Loan repayments.
Payment of your loan principal is not a business expense (so not in the Profit and Loss Report), but it definitely reduces your cash.

9. Depreciation.
This is a way of gradually spreading the cost of your fixed assets, (e.g. plant and equipment, vehicles, etc.), over their useful lives. Depreciation is therefore recorded as an expense in the Profit and Loss Report but has no impact on your cash position.

The best way to fully understand the differences between cash and profit is to talk to us.

Book a meeting with us and we’ll explain them and help create a plan to increase your cash.

“Control your cash. Stick to your core business. Know your numbers.” – Marcus Lemonis

This information does not constitute financial or legal advice and is for general information purposes only. Please contact DLA Partners for specific advice relating to your particular circumstances.

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