Business Financials 101 – Profit is not Cash!


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
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
Cash Profit diagram

Got Questions?

For on-site support contact Paul your local MYOB Certified Consultant:

Call Paul at Account Keeping Plus 0407 361 596

2 thoughts on “Business Financials 101 – Profit is not Cash!

  1. Hi there I Really like the Article. Every Business need cash in the Bank. If we have cash sales, profit will usually correlate closely. when customers pay has an effect on the cash the business actually has.

    Like

    1. Thank you Jsmith, yes cash sale is the closest to actual profit. But how many businesses are mostly cash these days that are not hobbies or micro businesses?

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this:
search previous next tag category expand menu location phone mail time cart zoom edit close