Where's My Money?

The most common question I get asked by clients is a simple one, with a not so simple answer: Where is my money?
 
If my business is ‘making money’ then where the hell is the cash!
 
Time and time again when looking at a set of Management Reports we will see a tidy Net Profit in the Profit & Loss Report, but often no corresponding increase in cash, or even a cash deficit when looking at the Cash Summary Report (a quick look at the bank balance is usually enough!)
 
So, where is it? There are several answers. Here are the most obvious ones:
 
Accounts Receivable
 
The numbers in the Profit & Loss are on an accrual basis. This means your sales figures are based on what has been invoiced out, not on what cash has been received. The same for your expenses, and therefore the Net Profit.  So while you’re seeing a Net Profit in the books, this profit isn’t going help you pay the wages until your clients pay you.
 
We all have customers who are slow payers and this can have a huge effect on cashflow. The old saying is true, a sale is not a sale until it is paid. Invoice as soon as the job is complete, and put your customers on seven-day terms. Robust Terms of Trade are essential in today’s environment.  Actively chase your debt. Don’t let customers use you as a bank to assist with their own cashflow issues. After all, a bank charges interest for the use of their money.
 
Drawings
 
It’s quite common for a small business owner to take money out of the business, and their accountant will allocate a Shareholder Salary at the end of the financial year to compensate. The cash taken out each week or fortnight is coded to the Shareholders Current Account as Drawings. This is not reflected in the Profit & Loss until the end of the financial year when the salary is allocated.
 
So even though a profit is showing, this will be reduced when the owner’s remuneration is accounted for. An alternative option is to pay yourself a PAYE wage which is shown in the P&L as it’s paid. There are some other advantages to paying yourself a PAYE wage, but that’s a topic for another day!
 
Loans
 
Just bought a new 10-tonne digger because you got sick of renting one? Or purchased that new Ford Ranger you’ve always wanted? Chances are you financed the majority of it (if you paid cash you probably wouldn’t be reading this article!)
 
Here’s the clincher: Only the interest portion of the loan repayments are shown in the Profit & Loss. The principal payments (which make up the majority of the loan repayments) are deducted off the loan balance on the Balance Sheet. Almost all of the cash you are throwing at the loan has no effect on your profit, causing sometimes huge distortions between profit and cash in the bank.
 
On a side note, you might have heard some pearls of wisdom like ‘If you’re paying GST then you must be making money.’ This is not necessarily true. If the majority of your Cost of Sales is wages (think service industries like painting),
you could well have made no profit or even suffered a loss, but still have GST to pay. This is because wages are exempt from GST. So you are paying GST on your sales, but only claiming GST on your overheads and materials.
 
So, how do you manage it all? Simple. Don’t pay yourself, don’t borrow any money and don’t give credit to your customers….if only it was that easy, right?
 
A good start is creating a robust Cashflow Forecast. This is essential to managing the peaks and troughs of your business, knowing when you might need assistance in the tough times (i.e. over Christmas) and when you may have excess to put aside for a rainy day (or to pay off that debt..)
 
Have a chat to your local RightWay Regional Partner if you would like to know more!

Sam Cherry CA