The business is profitable, so where’s the cash?


You’re not the first business owner to puzzle over this one…

How can there be plenty of cash in the bank, but you’re not profitable, and vice versa?

It’s important to understand that just because your accounts look healthy, doesn’t mean your bank balance will.

Why is that?

  • Sales – in other words the invoices you have raised, show in the accounts, but it doesn’t mean you’ve been paid. Invariably this is just a timing issue, that will all come out in the wash, but do make sure you have a good process for credit control

  • Stock – you might have products on the shelves that have left a hole in your bank balance, but you are yet to sell them

  • Accountancy practice – to comply with regulations and procedures, your accountant will need to show figures in a specific manner. For example, if you purchase a large piece of equipment (known as a fixed asset), it is likely to show in your profit and loss account as depreciation. If an item is depreciated over a three year period, only one third of that will show each year in the accounts. Hence the accounts show a healthier balance than your bank account

And what about when your bank balance looks good, but the accounts are saying something different?

  • Purchases – so the opposite story to the sales, you’ve been invoiced by your suppliers, but haven’t paid yet

  • VAT – this can catch out a lot of business owners. You need to remember that the VAT element of any invoice you raise is not yours. It’s in your bank account, until you are due to pay HMRC, so you need to keep it safe, and not spend it. Believe us, you do not want to upset the Revenue. In fact I often recommend to clients that they set up a separate bank account and move 20% of their sales across.  This way you will always be ahead of your VAT bill

  • PAYE and NI – you account for these in the month you pay the salaries, but are not required to pay HMRC until the following month. Just a short time lapse, but sorry, that money doesn’t belong to you

In part two of this post, we expand this by looking at an example.

In the meantime, if you need help with your accounts and cashflow, please contact us on 01420 362 363.