Why Your Profit Is Not Your Bank Balance

"The report shows a profit, but I have no money in the bank!"

I hear this very often. How is it possible?

The answer sits in two reports: the Profit & Loss Account and the Balance Sheet. They are the two most important financial reports prepared for a business. Unless you are an accountant or bookkeeper, they are still little understood by most.

First thing to know

Usually, both reports are based on your sales invoices and your supplier bills. They are NOT based on the money you have received or paid out.

That would only be true if you run a cash business, where customers pay in cash and you buy goods in cash.

In all other cases, which is how most businesses work, there is a delay between sending an invoice and getting paid. The same goes for expenses.

So the amounts on the Profit & Loss may not have been received or paid yet. That is why you cannot compare them to your cash flow amounts. And that is the answer to "profit but no money".

Second thing: what each report is

The Profit & Loss is a statement of the "trading" income (sales) and expenses of the business. In other words, how much have you sold, and what expenses did you have to make those sales?

For example:

• Sales 100,000
• Less: Purchases 50,000
• Premises 10,000
• Wages 20,000
• Administrative costs 10,000
• Miscellaneous £5,000

The above leaves a net profit of £5,000.

The Balance Sheet is a statement of what your company is worth at a certain point in time. It is worked out from your debts (bank, loans, creditors and such like) against your assets. The balance of those is the worth of your company.

For example:

• Assets: Building and Furniture £150,000; Debtors £20,000; Bank & Cash £10,000
• Debts: Creditors £17,500; Mortgage £90,000; Bank Loan £22,500

The above leaves a net worth of £50,000.

The Balance Sheet will also usually show how this £50,000 is financed, such as shares, and previous profits or losses accumulated.

You can look at it like this: if you stopped trading right now, and all monies owing were paid and received, and all your property was sold, how much would you be left with?

Three words explained

• Debtors: what your customers still owe you.
• Creditors: what you still owe to your suppliers.
• Assets: items or property owned by a business or person which have money value. These can be physical, like buildings, machinery or furniture, or financial, like debtors or money in the bank.

There is more to say on this subject.

Until then, and as always, keep it simple and... Flourish and Prosper

Lisa