Many a business owner has run a profit and loss report with a nice net profit and wondered “why is there no money in the bank”?
Well, my friends, that business owner has failed to also run a balance sheet report.
The profit and loss simply shows how much income and expenditure there has been during a select period of time. However, that income and expenditure relates only to the sales, and the expenses, that are not capital in nature. Did I lose you already??
Well, any items that classed as capital purchases - eg. computer, car, property, sit on the balance sheet. As do loans taken out or personal drawings. So any $$ spent on loan repayments or capital purchases are not reflected in the expenses on the Profit and Loss report.
And that is why you are showing a healthy profit but have no money.
So, how do you rectify this situation?
Stop spending! I know, not always possible. But, in order to work out if your business can afford that new iMac or that second year apprentice, you should keep an up-to-date cash flow projection on the go. This will give you a great estimate of how much money you are likely to receive in sales, and how much you might be spending, combined with a running projected bank balance. A great cash flow report will also provide insight on when those pesky ATO payments are due and allow you to plan ahead and not get caught out.
If you need help setting up a cash flow forecast, call us now!