I'm profitable but I've got no cash!
Posted on 16 Nov 2020
When talking to clients I often hear the comment from a small business owner that they are profitable but never seem to have any cash, states small business accountants Harris & Co. So what is the issue?
Understanding the main reasons why this is happening and then managing your business to resolve the issue is critical to a better business.
It is important to understand that your profit and loss account is used to report the income and expenses of your business, whereas the cash flow reflects the timing of when you actually receive the income and pay the expenses.
For example, your profit and loss account might show a profit but you might have some of the sales still in debtors because they haven’t paid the bill yet. If you don’t manage your debtors then the cash coming into the business will be reduced. If you pay your expenses quickly you can find that you will have a significant cash shortage. That’s where that empty wallet comes from!
Ensuring you have an effective debtor collection process is essential if you want to keep the cash flowing regularly into the business.
It’s also a good idea to match your payment of expenses to receipts of cash from your debtors.
If your suppliers require payments in 7 or 14 days then your debtors should pay in a similar time frame.
Now can you see why you are profitable on paper but your wallet holds no cash?
