Where are my profits?

Where are my profits?

Your accounts show a healthy profit, you (or your company) are faced with a hefty tax bill, but…


So if there’s little, or nothing in the bank how do you have profits, and more importantly, where are they.

Cash versus accruals

I don’t want to lose your attention so soon, so I’ll not go into too much detail here. Profits for accounting purposes (and consequently tax purposes) are calculated using the “accruals” concept.

Basically, this means that a transaction (sale or purchase) is recorded in the company’s accounts when it actually occurs. For sales this is when the good or services are delivered; for purchases, when they are received.

The transfer of cash does not always happen at the same time as the sale or purchase.

The secret is in the balance sheet

If your accounts show a profit, but your bank account doesn’t reflect this you need to delve a little bit deeper into your balance sheet.

The balance sheet shows what the business owns and what it owes (hopefully the former is larger than the latter).

Expenses that don’t reduce profit

Certain business expenses don’t reduce profit. These are generally “capital” items, such fixed assets, ie plant, equipment, computers etc. Things the business is likely to use for more than one year. The value of assets represents profits that have been reinvested back into the business.

Stock (for resale)

Unsold stock at the end of the accounting period will actually increase profit. This is because the accruals concept matches income with the expenses incurred to create it. That means that only the costs of stock that has actually been sold will be used in calculating profits. The rest is sitting in your balance sheet as something you own.


Something else you own as it is cash owed to you.

Locked up in here are sales you have made but for which you’ve yet to be paid.

This is where most of your profits are probably hiding.  It is important to manage debtors wisely so profits can be realised and converted into cash. Once they’re converted into cash, you can pay your debts, staff and yourself, reinvest in assets and stock, and keep the whole things rolling.

While (technically) surplus stocks or assets may be sold to generate cash, the trick is not to over spend in the first place.

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