“If I really made that profit last year, where did it go, because it definitely isn’t in my business bank account!” is a comment we hear very often from business owners.
Starting a business is a crazy ride with many ups and downs. One hurdle that practically all new entrepreneurs encounter is the difference between the profits they expected and the actual cash available at the financial year-end. This article touches on the possible causes, and how to quickly identify them.
Possible causes of missing profits
There may be several reasons why your business has shown good performance throughout the year, yet there’s little cash to show for it in the end. Here are a few possible places your profits could be hiding:
- Unpaid debts: Some of your customers might have acquired your products or services without paying you yet.
- Inventory: Your profits might be tied up in unsold stock or raw materials.
- Asset acquisition: If you’ve purchased new assets like a work vehicle or equipment, these expenses are depreciated over several years and not all claimed in the year of purchase.
- Owner withdrawals: Personal withdrawals that you have taken from the business that are not featured in the profit and loss report, but still deplete business cash reserves.
OK so you have identified the 4 places where your profit could be hiding. How do you narrow it down further? By using the Balance Sheet:
The most important report that shows where your profit is currently tied up, is the balance sheet. A “hack” that we use for our clients: We go into our client’s Xero file and run 2 separate balance sheet reports that are exactly 12 months apart (e.g 30/06/2024 and compare to 30/06/2023) and observe the variances in all the items in the balance sheet.
For example, If your cash balance is very similar to the previous year, but your accounts receivable has increased significantly, then you know that a lot of your profit is tied up in unpaid customer invoices. Time to send a friendly prompt to your customers to make payment!
See below for this example as a visual, from Xero. As you can see, cash balances have barely changed year on year, but accounts receivable has increased significantly compared to the previous year.
If you’re facing a year-end with profits but no or similar cash in hand, firstly view the balance sheet to uncover if your cash is tied up in extra stock, debtor accounts, new assets, or personal drawings. If you have any issues accessing these reports, contact us so that we can go through your financials with you.
DISCLAIMER: This is general information only and is not advice. Liability limited by a scheme approved under professional standards legislation.