If I've Made Such a Good Profit
Where's the Cash?
Posted by Maureen Windridge on 21/11/2013
This is a very common question which I get asked by my Bookkeeping clients. The answer is in the Accounts in the form of a Cash Flow statement. The Cash Flow statement looks at the differences between two balance sheets and gives an analysis of how the business is utilising the profit made ...
the answer is in your accounts
One of the most common uses of cash in businesses that manufacture or resell goods is stock; stock of raw materials and goods for resale can tie up an awful lot of your cash. This means regular stock checks are essential and changes in the value of stock need to be accounted for. Stock is usually valued at cost; however don't forget the hidden cost of a large inventory, cost of storage and insurance. Good stock management is essential!
Are your customers making use of your cash? When you give credit, you are investing your resources in someone else's business. You can calculate the average number of days your customers take to pay you and compare this with your payment terms. If your customers are taking too long to pay then maybe you need to review your credit control procedures.
Is your business expanding too fast or doing more business than it can afford? This is a situation accountants refer to as "overtrading". Sales are soaring, (whoop whoop) but cash is going out of the door at a rate of knots.
Perhaps the business has had to increase staffing levels, increase stock levels, or have your marketing costs soared in order to get this extra business? Growth needs to planned and controlled in order to avoid overtrading.
Is the business borrowing more than it can afford? When loans and H.P. payments are made only the interest is accountable as an expense. A large percentage of the repayment will go to reducing the capital aspect of the borrowing. This uses cash but does not reduce the profits.
This is an enormous subject and there are many more reasons why a profitable business can be short of cash. Again, the answers are always in the accounts!
If you'd like to understand more and see a clearer picture of how your Bookkeeping and Accounts should be working, I'd love to help you. Why not give me a call on +44 (0) 1908 692378 today?
Until next time ...
I consider myself to be incredibly lucky because I am a bookkeeper. At the age of thirteen I did a three year course in three months and passed with distinction. Many years have gone by since then and I am still fascinated by the process of double entry bookkeeping. A process developed over 500 years ago by a venetian monk called Luca Pacioli.
Many people would like a machine that they could put all their paper work into at one end and it would come out the other end all sorted totalled and balanced. I'm glad it hasn't been invented because it would take all the fun out of my work!