What does it mean Profit is not Cash? Does that explain where is my profit when there is no money in the bank?
Are you showing a profit in your business, but wonder where is your profit, when there is no money in the bank? And what does it mean when accountants say “Profit is not Cash?”
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. 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. 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.
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 (negative!)
That is, what this is – if you still had paid all your bills, you would still have to find $35,000 to pay them – see here
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