One of the most common questions I am asked when sitting with clients presenting their previous financial statements is, ‘Where did the money go?’
One of the biggest misconceptions is that profit equals cash. In fact it was seen through the GFC that many businesses that went into liquidation were actually profitable businesses that ran out of cash.
The challenge is that your profit is used to pay for:
• New Plant and Equipment
• New Motor Vehicles
• Repay Hire Purchases
• Repay Capital on Loans
There is also the timing difference of the flow of cash between the profit and loss i.e.:
• Debtors- you may include the sale but may not have been paid
• Creditors- you have claimed the expense but have not paid your supplier
• Stock purchases- if you have stock on hand
If you can master understanding the difference between the Cashflow and the Profit in your business you have overcome a major hurdle. The key is to have a budget and a cashflow that you monitor regularly to ensure you are on track.