My business is making a profit but where’s the money gone?
Updated: Feb 15
This is a tough one but it’s also a common one. You slog away at your business, pay your bills on time but at the end of the day there’s nothing left. Basically, profit does not equal cash. To understand where the money has gone you need to look at your balance sheet. If you don’t know what this is, or how to understand it, that’s okay, we can help you.
How much is owed to you by your customers?
Yes, you pay your bills on time but are your customers doing the same? Have you got a handle on your customers’ credit terms? You’ve made the sale now you deserve to be paid in a timely manner. Look at your credit terms for each customer and then compare that with the actual time it takes each customer to actually pay you. Also, check if the payment period has started to increase. Maybe it started out at 30 days but has now be drawn out to 45 or 60 days.
If you are using accounting software it should be able to calculate this for you. If you don’t know where to start we can help.
Get into the habit of checking who owes you what and chase up anything that is outside your credit terms.
I can hear the moans and groans from here! “But I hate asking for money!” If it was someone else’s business and you were asked to chase up the outstanding amounts could you do it? Most likely, yes - because it isn’t your business and therefore you are detached from it. So, do the same. This isn’t your money, it’s you family’s or it belongs to the charitable institution you are committed to contributing to. They deserve it. You deserve it.
So, you have a shed full of stock for your business. How long is it going to sit there? It may sound obvious but the sooner this is sold the sooner you will be paid. Understand the trends for your business and thereby understand how much stock you need at any point in time.
Personal withdrawals from the bank account.
Your business bank account is not your personal slush fund. When you start out in business you may not be earning enough to take out a wage, especially if you worked full time previously. It can be a temptation to grab a few dollars here and there to tide you over. Resist the temptation because this can get out of hand.
Sit down with your accountant and work out what wage you are able to take from the business and stick to it. Your business will thank you because you need to reinvest in your business to help it grow.
Bills and Invoices you pay
If you are paying all your invoices on time, or before they are even due, but your customers are not doing the same, you are going to be out of pocket. Your suppliers will love you but your bank may not. Regularly review what you are paying and when you are paying it. If the supplier’s terms are 30 days but you regularly pay in 7 days re-think your tactic. If you are already paying at the maximum terms then consider negotiating better terms with your suppliers.
Hopefully this has given you insight into some of the differences between profit and money in the bank. It’s definitely not an exhaustive list but sets you on the right path. If you need help, we’re only a phone call away.
Contact us on 0422 391 370 or via our contact form to chat further.