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Accountants often talk about ‘profit’, which of course is what business is there for to make. We may then visualise this as actual cash that can be used and is sat somewhere waiting to be claimed. Generally speaking yes, although ‘profit’ and ‘cash’ are two different entities.
Your accounts are geared to show profit (or loss) within them, and assets (or liabilities) owned. By their nature they are helping to account-for and display the figures in a set format which ends up as this end figure. Even on an international basis there are accounting standards to even help see similarities between accounts in different countries, so you can then start comparing one business A’s accounts with another business B’s accounts.
This standardised format of figures can also be submitted to authorities like Companies House and HMRC, and shown to others wanting to see the viability of a business. Try giving any other general explanation or version-of-the-figures and they will get suspicious, after all it’s right and proper that a qualified accountant displays these in the correct way and signs them off.
This format can be ideal for larger businesses where essential figures can be quoted and referred to by other people and reports, for example how profit before tax has increased or decreased over time, and how depreciations is being assumed for certain assets etc.
The problem comes with often smaller businesses where the figures do actually mean real-cash to someone. So if the accounts are showing that you made a whopping x amount of profit last year, then surely there is x amount of cash now sat in the bank ready to be used however. Reality though can be different – you can be profitable on paper but have no money available, and also (although less often) losses on paper but somehow money in the bank.
This is where you need to quiz your accountant. It’s not that they’re doing anything wrong, they just need to help you de-jargonise this profit language and help you appreciate what this means in reality with yours or your business’ cash-flow.
Often you just need to trace where the actual cash is to mirror the profit – maybe customers or clients owe you money, and you simply need to carry out some credit-control and chase these which will be accounted for in the books but not actually paid into your bank as of yet.
On the other side, there may be issues with paying suppliers and those you incur expenditure with. You may have needed to pay someone in advance, a classic example is rent on commercial property in the UK which is often paid 3 months in advance therefore a whole 3-months cash may have left your bank but you have only needed to account for an apportionment of this cost in your accounts.
Likewise, you may have excessive cash from not yet actually paying a supplier that has already invoiced you and therefore showing as cost in your accounts and reducing your profit – you’ll therefore have more money in your bank than what you think.
In short – make sure your local accountant helps explain this so you know what actual profit means in the real world of cash.
Andy Nuttall has not set their biography yet
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