Profit, where is it?
This is a common question we get at this time of the year. If I had $1 for every time I was asked this question I could upgrade my golf clubs.
Do you believe that if there is no money in the business bank account at 30 June then the business has made no profit and as a result there is no tax to pay? A lot of business owners fall for this common misconception. They confuse profit with cash flow. Cash flow and profit are indeed not the same.
The business profit and loss statement will indicate how the business performed. However, it will not tell you where the money went. The other document your accountants prepare for you, being the balance sheet, is where the answer can be found.
A review of the balance sheet at the start of the year and the end of the year will show where the profit has gone. Typically, it will be in the following areas assuming you have excluded the bank account:
- Your debtors (money owed to you) have increased;
- Your inventory (stock, work in progress) have increased;
- Purchases of assets (cars, equipment, etc) have increased;
- Your creditors (money you owe) have decreased;
- Loans have been paid off.
Knowing what your numbers really mean will help you make informed business decisions. Contact us today if you want to gain a greater understanding of your business!