Your Business Is Making Money… So Where Is It All Going?

Why a healthy profit doesn't always mean a healthy bank balance. It's a conversation we've had with plenty of business owners over the years.

"Mel, my financial statements say I've made a profit, so why is there no money in my bank account?"

It's a fair question. And sometimes, it's a particularly frustrating one. You've worked hard all year. Sales have been good. You've kept busy, paid your bills, looked after your staff and done everything you're supposed to do.

Then your accountant tells you the business has made a healthy profit.

Fantastic!

Except you're looking at your bank account wondering where on earth all that money has gone. Sound familiar?

Well, there's a good reason for it. Actually, there are several. And understanding them can make an enormous difference to how you manage your business.

First Things First – Profit and Cash Are Not the Same Thing

This is probably one of the most important things any business owner can understand.

Profit is what your business earns after accounting for its expenses. Cashflow is the actual money moving in and out of your bank account.

They are connected, but they are not the same.

You can have a profitable business that's constantly struggling to pay its bills.

You can also have a business with plenty of money sitting in the bank that isn't actually making a profit.

And to make things even more interesting, depending on how your accounts are prepared, some transactions affect your profit but not your cash, while others affect your cash but not your profit.

Let's look at where some of that money might be disappearing.

1. The Money in Your Bank Account Isn't Necessarily All Yours

This is a big one.

When a customer pays you $11,000 for a sale that includes GST, that entire $11,000 lands in your bank account.

But assuming the sale is fully taxable, $1,000 of that amount is GST that will generally need to be paid to the ATO, after allowing for any GST credits you're entitled to claim.

The problem? It all looks like available money.

And when you've got wages, suppliers, rent, insurance and everything else coming out, it's very easy for that GST component to get swallowed up in everyday business expenses.

Then BAS time rolls around.

Suddenly you've got a bill to pay, and the money isn't there.

Our tip: Consider keeping a separate bank account for GST, PAYGw and other tax obligations, and regularly transferring an appropriate amount into it. See our BLOG on the 40% rule.

It might not make the tax bill any smaller, but it certainly makes it less of a surprise.

2. You've Made the Sale… But Haven't Been Paid

Here's another common trap.

You've invoiced a customer for $15,000.

The work is finished, the invoice has been issued, and under accrual accounting, that income may already be included in your profit.

But the customer hasn't paid.

Maybe they're on 30-day terms. Maybe they're a little slow. Maybe you're still chasing an invoice from three months ago.

Meanwhile, you've already paid your employees, purchased materials and covered the costs of delivering the work.

So, on paper, you've made money.

In reality, you're still waiting for it.

Our tip: Keep a close eye on your outstanding invoices. Review your aged receivables regularly, follow up overdue accounts and don't be afraid to revisit your payment terms.

You're running a business, not providing an interest-free loan service!

3. Loan Repayments Are Eating Into Your Cash

This one catches people out all the time.

Let's say your business has a vehicle loan. Each month, $1,200 comes out of your bank account. Naturally, you assume that's $1,200 worth of expenses.

But that's not quite how it works.

Generally, the interest component is an expense, while the principal repayment reduces the loan balance rather than your accounting profit.

Cars, equipment, tools, machinery, business premises, fit-outs… those loan repayments all add up!

The vehicle itself may also be depreciated over time, creating a separate accounting expense.

So, you could have thousands of dollars leaving your bank account each year in loan repayments without the principal repayments reducing your reported profit.

Our tip: When reviewing your business performance, don't just look at your profit and loss statement. Look at your Balance Sheet that shows your loan commitments, and your cashflow as well.

4. You've Invested Money Back Into the Business

Perhaps you've purchased a new vehicle, upgraded equipment, increased your stock levels or invested in new technology.

All good things, potentially.

But they can also explain why your bank balance doesn't reflect your profit.

For example, purchasing $20,000 worth of equipment doesn't necessarily mean you have a $20,000 expense in your profit and loss statement.

Depending on the asset and the applicable tax and accounting rules, that purchase may be recorded as an asset and depreciated or deducted over time.

Similarly, buying stock can tie up a significant amount of cash before you've actually sold anything.

You've spent the money, but the accounting treatment doesn't necessarily reflect the full cash outlay as an immediate expense.

Our tip: Plan larger purchases carefully, and consider what they mean for your available cash, not just your tax position. And remember, spending $10,000 to save some tax still means you've spent $10,000!

5. You're Taking Money Out of the Business

Now, this one can be a little uncomfortable to talk about.

But it's important.

For sole traders and partnerships, money taken out as drawings generally isn't a business expense.

Okay, we may have exaggerated a little with this picture… but dipping into your business account for personal spending can really eat into your cashflow!

It reduces the cash available in the business, but it doesn't reduce the business's accounting profit.

For companies, payments to owners and directors can be treated differently depending on whether they're wages, dividends, loan repayments or other transactions.

And those distinctions matter.

Sometimes business owners look at their financial statements and can't understand why there's so little cash remaining, without realising how much has been withdrawn throughout the year.

It's not necessarily a problem to take money out of your business.

After all, that's one of the reasons you're in business!

But it does need to be planned and properly accounted for.

Our tip: Make sure you understand how much you can sustainably withdraw from the business while still leaving enough to meet its ongoing commitments.

6. Your Business Is Growing – And Growth Costs Money

This might sound a little backwards, but sometimes a growing business can experience more cashflow pressure than a struggling one.

More sales can mean:

• More stock to purchase.

• More staff to pay.

• More equipment and resources.

• Larger supplier bills.

• More money tied up in outstanding customer invoices.

• Greater working capital requirements.

And often, those costs need to be paid before the additional revenue arrives.

So while growth is generally something to celebrate, it needs to be managed carefully. We've seen businesses that are incredibly busy, turning over more than ever, but still feeling like they're constantly chasing their tails financially.

Our tip: If your business is growing, your cashflow forecast needs to grow with it.

More sales don't automatically mean more money in the bank.

7. Your Costs Have Crept Up Without You Noticing

And finally, there's the slow creep of everyday business expenses.

A little more for insurance.

Another software subscription.

Higher wages and superannuation.

Increased supplier costs.

Bank fees, merchant fees, fuel, electricity, rent…

Individually, some of these increases might not seem significant.

But collectively?

They can take a substantial bite out of your margins.

And if you haven't reviewed your pricing for a while, you might be working harder, turning over more and actually keeping less. That's not a particularly rewarding outcome for all your hard work.

Our tip: Don't wait until the end of the financial year to review your expenses and pricing. Make it a regular part of managing your business.

So, How Do You Actually Work Out Where the Money Is Going?

The good news is that you don't need to become an accountant to get a better understanding of your numbers.

But you do need to look beyond your bank balance.

Here are five things we'd encourage every business owner to do.

1. Review Your Profit and Loss Regularly

Not just once a year when your accountant prepares your tax return.

Look at your income, expenses and profit throughout the year. If you are one of our clients where we are doing your BAS and Reporting, we are sending you these reports with commentary and suggestions each quarter.

Are sales increasing? Are your costs rising faster than your revenue? Are your margins where they should be?

2. Understand Your Balance Sheet

I know, I know. The balance sheet isn't exactly everyone's favourite reading material.

But it tells an important part of the story.

It shows what your business owns, what it owes and the financial position of the business at a particular point in time.

It's where you'll find things like loans, outstanding customer invoices, unpaid supplier bills and other balances that can help explain what's happening to your cash.

Your Profit & Loss tells you how your business is performing, but your Balance Sheet helps tell the rest of the story! What you own, what you owe, and where some of that hard-earned money has gone. Not exactly bedtime reading, but definitely worth a closer look!

Guess what!? We have a BLOG all about understanding your financials. You can read it here.

3. Know What's Coming Up

Tax bills, superannuation, insurance renewals, loan repayments, equipment purchases and annual subscriptions shouldn't come as a complete surprise.

A simple cashflow forecast can help you anticipate when money will be coming in and when larger payments will need to go out.

4. Keep Your Business and Personal Finances Separate

This makes life easier for everyone.

Clear records, separate accounts and a planned approach to owner payments make it much easier to understand how the business is actually performing.

5. Ask Questions!

If you're looking at your financial reports and something doesn't make sense, ask us.

You don't need to understand every accounting entry.

But you should understand what your numbers are telling you about your business.

And sometimes, a relatively simple conversation can uncover something that makes a significant difference.

A Profitable Business Should Also Be a Sustainable Business

At the end of the day, making a profit is important.

But profit alone doesn't pay the wages on Friday, cover the BAS next month or put fuel in the work ute.

Cash does.

And that's why we encourage business owners to look at the bigger picture.

Your financial statements aren't just something we prepare to keep the ATO happy. They're a tool to help you understand your business, make better decisions and plan for what's ahead.

Sometimes the answer to "Where has all my money gone?" is relatively straightforward.

Sometimes it uncovers something that needs a closer look.

Either way, it's a question worth asking.

And we'd much rather help you understand the answer now than have you discover there's a problem when the next big bill arrives.

If you're making a profit but constantly feeling short of cash, or you're simply not sure what your financial reports are telling you, have a chat with the team at MJA Business Solutions.

Because working hard in your business is one thing.

Making sure that hard work is actually working for you? That's what really matters.

We're here to help.

Mel