Business Financials 101 – Profit is not Cash!

October 30, 2012 by accountkeepingplus 2 Comments

Even if there is a profit in business, many wonder why they may not have cash in the bank. If you have cash sales, profit will usually correlate closely. But if you invoice clients for goods and services, the timing of when customers pay has an effect on the cash the business actually has. For example not everyone pays on time, but if they did you would have regular cash flow, and only be delayed by the initial terms at the beginning eg 7 days, 30 days. Once those days have passed, the regular payments will mean regular flow of money to cover your expenses.

What if clients are late paying? Then the debtors on your balance sheet will grow (that is where the invoice “waits” for payment) until the client pays.

As an example, in our previous post explaining Profit and Loss, see HERE we gave an example of Profit and Loss resulting in $15,000 profit.

Profit & Loss Diagram

But what if you were only paid half of the sales at the end of the period (which is more close to reality – eg most pay the next month or two…)

Sales (invoices)                                   $100,000

But only paid (actual cash)                   $50,000

Which goes to bank (in assets)

Net Left                                                 $50,000

Which sits in debtors/receivables (in assets)

Note – PROFIT would be same in accounting terms,

but CASH Profit would be                   – $35,000

That is – if you still had paid all your bills, you would have to find $35,000 to pay them – see next

Cash Profit diagram

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