By Garrett Douglas & Davin Tranter

If I am making a profit where has all the cash gone? This is a question that we get asked a lot. The answer is usually simple but can be hard to explain and understand. So hopefully what follows will answer some of your questions and help you to understand your business a little better.

Profit versus Cash Flow

Firstly, let’s get some basics out of the way and look at what profit and cash flow actually is. In its simplest form, profit is what is left over after subtracting your expenses from the revenue (sales). This is generally the first number that a business owner will look at to determine if all the effort they have put in is worth it. It is also the number with some adjustments that you pay tax on.

On the other hand, cash flow refers to the balance of cash moving in and out of a business. If more cash comes in, then you have a positive cash flow and vice versa. While maybe not as eye catching as a good net profit, cash flow can be just as important, if not more so.

There may only be a subtle difference when looking at profit compared to cash flow and they can often reflect each other, but this isn’t necessarily the case and high profits don’t always produce positive cashflows. One isn’t more important than the other, but managing both well is essential to running a successful business.

Why the difference?

There are some key differences between profit and cash flow that usually explains why they aren’t the same. Here are some examples of where these two differ:

Profit is usually reported on an accrual basis meaning that sales and expenses are accounted for when invoiced, not paid.
The accounting or tax treatment of a purchase may not reflect the cash paid for it. For example, asset purchases may be depreciated meaning only a portion of the purchase cost is deductible each year.
Timing and payment of PAYGW, super and income tax.
Borrowing for purchases may mean that an expense is claimed but the cost of it is paid off over a period of time.
Personal capital introduced and drawings taken out aren’t included in the profit but do impact the cash flow of the business.

When poor cash flow is present in a business there can be several causes. Below we discuss some of the common causes that lead to cashflow issues for a business, as well as some of the steps that can be taken to help avoid them from occurring.

Withdrawing Funds

It is important to ensure you’re not withdrawing too much money out of your business for personal use. Having your business’ funds at your fingertips, it is easy to withdraw money out at any time to meet your personal needs. While this may sound self-explanatory, it is an easy trap to fall into. To help avoid this trap:

Separate business and personal spending.
Set up a regular transfer to a personal account for your everyday living costs.

Taxes and Super

Knowing when your tax and employee obligations are due to be paid will allow more effective planning and budgeting for your business. With the different timings of when all these payments are due, it can be easy to lose track. To assist in managing your tax and super obligations:

Set up a savings account to transfer funds into, in preparation for making these payments and lessen the blow of a big tax bill.
Check out our comprehensive summary of lodgement deadlines on our website.

Excessive Debtors

Are your customers paying you on time? A longer time frame for cash turnover will negatively affect your business’ cashflow. Fortunately, there are ways that this can be avoided:

If your payment terms to customers are too generous, look to reduce this period. For example, rather than allowing 30 days for payment, reduce this to 7-14 days.
Implement processes for effectively tracking and following up on outstanding debts such as monthly reconciliations or limits on accounts.

New Business and Expansion

If you are just starting out in business or looking to expand, it is somewhat inevitable that you will be experiencing significantly higher cash outgoings. This can be good in the long run but understanding and managing your cash flow is important to keep in mind as well.

Prepare a budget and keep track of it. Don’t go blind into anything new.
Don’t over extend yourself with borrowings, either from the bank or using personal funds. If you can’t sustain high enough sales to meet your debt obligations issues will arise.

The differences between profit and cashflow can easily be misleading when managing the operations of your business. In brief, best practise is planning in advance for the upcoming costs and monitoring cash flow regularly.

If you require further assistance in managing your cashflow, reach out to us as we would be happy to help out.

Do you have a business name OR a trading name?

The tax office have announced that trading names will be removed from all ABNs in November 2023. A 'trading name' refers to an unregistered name that businesses could use before the introduction of the National Business Names Register on 28 May 2012. After this date, if you wanted to call your business something other than its official entity name you were required to register a business name through ASIC.

An example of this is if you run a plumbing business as a partnership your official entity name may be “JA Bloggs & JB Bloggs” but you may trade under a business name called “Generic Plumbing Business”. To be able to trade under this name you should have registered a business name.

However, prior to May 2012, you could have a different business name to your entity which was called a “Trading Name” and these trading names have never been phased out until now. This has meant that some people may believe they have a registered business name but are actually just still have their trading name linked to their ABN.

If you think this may be you, you can check this on the ABN Lookup. When you enter your ABN it will show a trading name and/ or a business name. If you only have a trading name showing, this means you will need to register this with ASIC through the following link - Registering a business name with ASIC. See the example below which shows someone with both a business name and trading name. As you can see by the wording the trading name will be removed in November.

If you would like to register a business name there is a cost involved:

$42 for one year; or
$98 for three years

If you need any assistance in checking this or registering a business name, give us a call on 9841 1200.

Where has the cash gone?