The entrepreneurial journey is an exhilarating rollercoaster, marked by highs and lows. However, one common hurdle many new business owners face is the disparity between anticipated profits and the actual cash available at the end of the financial year. This guide is designed to ease these concerns by shedding light on potential sources of missing revenue.
Uncovering Hidden Profits
Despite your business showcasing stellar performance throughout the year, there might be minimal cash to show for it. Several culprits could be responsible for these elusive profits:
- Unsettled Debts: Some customers may have availed your products or services without settling their payments.
- Inventory: Profits might be tied up in unsold stock or raw materials, particularly if bulk purchases were made.
- Asset Acquisition: Expenses incurred for new assets, such as a work vehicle, are depreciated over several years, impacting the immediate claim in the year of purchase.
- Owner Withdrawals: Striking a balance in the amount of profit withdrawn for personal use can be a challenging task.
Navigating Financial Statements
Understanding your financial situation hinges on deciphering your profit and loss statement. This document encapsulates your business's income and expenses over a specified period, encompassing both completed and pending transactions. The inclusion of credit-based sales or purchases can create a disparity between profit figures and actual available cash.
Bridging the Gap
To align financial statements with the actual situation, routinely scrutinize your debtors. Being proactive in payment follow-ups and leveraging a cloud-based accounting system for real-time transaction tracking can facilitate timely decision-making.
Dealing with Creditors and Debtors
Transactions made on credit, both from customers and suppliers, can introduce a time lag between recorded transactions and actual monetary exchanges. This discrepancy can inflate figures in 'Sales' and 'Cost of Goods Sold' (COGS) categories while leaving the bank account seemingly stagnant.
Understanding COGS
Cost of Goods Sold (COGS) encompasses the direct costs associated with producing or acquiring the goods sold to customers. This includes initial inventory, purchases during a specific period, and remaining inventory at the period's end. Additional costs like freight, storage, and factory overheads may also contribute.
The Role of Reinvestment and Owner Withdrawals
Businesses often reinvest profits to expand operations, manifesting as increased stock, debtors, or capital expenditure. Conversely, excessive owner withdrawals can impede growth and deplete cash reserves. Establishing prudent budgets for each owner is crucial to prevent overdrawn profits.
The Bottom Line
If you find yourself at a fiscal year-end with apparent profits but a shortage of cash, refrain from panic. Delve into your financials to uncover if your funds are tied up in surplus stock, debtor accounts, or new assets. Managing a business is a journey, and a nuanced understanding of these financial intricacies empowers you to navigate it with greater finesse.
For a comprehensive exploration of your financials, feel free to reach out to us!