I hear this question a lot, where is the profit because it definitely isn’t in my bank account.
It is because profit isn’t the only thing that is happening in a business, there are the items that are sitting on your Balance Sheet that are influencing your Bank account balance.
Here are the 5 reasons for the difference:
1. Debtors or Receivables or Customer Invoices
These are all the same thing, just different terms.
When you let someone buy a product or service on account to pay at the end of the month, or what ever time period after the purchase. That sale is on your Profit and Loss but is not in the Bank account. Most businesses have a mixture of Cash and Account customers. If you let those accounts go past your trade terms, you are now effectively giving your customers an unsecured loan.
2. New Assets
When you buy equipment that is new or used to help you produce your product or service or helps you run your business, that money comes from your Bank account. That amount for the asset sits on the Balance Sheet and does not affect your Profit and Loss.
Does not matter whether you have taken a loan as that will sit on the Balance Sheet as well. Usually you have made a upfront deposit against that asset.
3. Bank Loan
When you started your business you probably took out a loan to purchase equipment or help with the initial startup expenses. There is also the extra equipment you have bought along the way and increased your level of loans.
The loan payments will come out of your Bank account and will affect your Balance Sheet. Only the interest portion will affect your Profit and Loss.
4. Creditors or Payables or Suppliers Invoices
These are all the same thing, just different terms.
When you purchase goods from your Suppliers on trade terms. Which means you pay for them later. You have taken up the expense of the goods now so affecting your Profit and Loss but your Bank account is not affected till that later date.
Usually Debtors are higher than Creditors because you have more sales than you have expenses, especially in a Net Profit scenario as opposed to a Net Loss scenario.
5. Drawings
When you have the business pay for personal expenses or draw money for the owner to use that sits on the Balance Sheet. This doesn’t touch the Profit and Loss but still comes out of the Bank account.
There is always the option to draw a wage from the business so that it is expensed on the Profit and Loss.
There is always more to learn about the money side of a business. Understanding or knowledge gives you more control and confidence about what you are doing, to then achieve your dream.
If you want to understand how cashflows through your business, like blood flows through your body then have a look at the Thriving Blueprint Course.