Why Can a business show a Profit and Not Have enough Cash?

Do you feel frustrated when you see your monthly or quarterly P&L reports?

Are you rushing to meet the payroll deadlines every week or every two weeks?

How is it possible that the company is profitable but you are cash-strapped?

Many business owners believe that sales and cash flow are interchangeable terms. No, they aren't.

• Profit is the difference between revenue (sales) and expenditures (expenses).

• Cash flow refers to the amount of money that enters and exits your company. More money comes in than goes out, resulting in positive cash flow. Negative cash flow indicates that the company must invest more than it receives. Many times, not getting enough money comes from collecting rather than selling.

To thrive, a company must not only make money but also have a healthy cash flow. Cash flow is king when it comes to a business's viability.

Small business owners also fail to understand why, if their company is profitable, they do not have money in the bank. It's critical to recognize that a lack of sufficient cash flow is one of the most common causes for small companies to fail.

Here are few reasons mentioned by bookkeeping services providers that why a prosperous company may have little cash on hand, as well as what business owners can do to help handle cash flow and prevent a crisis.

·       Using business money for personal reasons

Company owners might be withdrawing money from their business bank account as though it were a personal bank account. Naturally, company owners must make a profit. Instead of treating their business account like a personal account, business owners should pay themselves a salary by moving funds from their business account to their personal account at regular intervals.

  If their personal funds run out, they can wait until the next withdrawal date to replenish their business account.

The use of a business account on a regular basis, even for small sums, adds up and can have a significant impact on a company's cash flow.

·       Implementation of enhanced Debtor management procedures

All companies need to make profits, and the only way to do so is for consumers to pay their bills. When it comes to customer invoicing, consistency and structure are critical. Failure to submit invoices on time, follow up when customers fail to pay, and perform proper credit checks on customers can all put a strain on a small business' cash flow.

 It's best if business owners send out invoices with simple payment terms and then follow up with their customers right away if they don't pay. They may also implement policies to prevent consumers that are unlikely to pay for services rendered or to reduce the risk of clients failing to pay their bills. Deposits, for example, are an excellent way to handle both cash flow and client relationships.

Another smart idea is to incorporate debtor management accounting add-ons/apps that can help boost cash flow. With a set of automatic follow-up actions including emails, SMS, and scheduled reminders for follow-up calls, such applications help businesses get paid faster. This will undoubtedly assist you in increasing your cash flow while retaining your customer relationships.

Contact our Bookkeeper in Melbourne to take advice on Debt management procedures.

·       Not ready for tax time

Taxes are something that many small business owners put off until later. When tax season arrives, they don't have enough time to prepare, such as putting aside money to pay the ATO. In certain cases, a company's profit has risen dramatically but the sum set aside for taxes has not. As a result, the business's cash flow will be severely strained.

 Taxes must be treated as a daily expense, and funds must be put aside each month to pay taxes and other obligations. Set aside even more money if revenues rise dramatically. Being prepared is much preferable to be caught off guard. Often seek the advice of an accountant or financial planner while making long-term financial decisions. The small business bookkeeping service providers ensure that your books are ready for tax season.

·       Not keeping track of financial reporting

The balance sheet, profit and loss, and debtors and creditors ledger are all reports that business owners can learn to read and understand. These figures indicate how much money comes in and where it goes. It also shows which clients have not paid their bills and which bills you have not paid.

It's critical to understand how to review data and interpret reports while using a successful cloud accounting software like Xero, MYOB, or QBO.

Moreover, maintaining Bank Reconciliation is also a crucial aspect.

 CONCLUSION

Business owners should take the steps required to ensure that their company not only makes a profit but also has cash on hand. By actually adopting good habits and tactics, entrepreneurs may stop using the company bank account for personal expenses. This would help the company expand faster by reducing cash flow.     

Liabilities must be understood by business owners because they impact the amount of cash available to the company. Also, minor debts can easily accumulate, so understanding how much is owed, how much is paid annually, and when those bills are due is critical.

At Reliable Bookkeeping Services, we ensure that we keep track of the money coming in and out of your small business and this will help you keep a better eye on things while ensuring that the company not only makes a profit but also has money in the bank.

 Please reach to us; we are the best result of your search “accountant near me”.