I am making a profit yet I have no cash in the bank. Why?

It’s approaching August. That time of year when here at Dexterous we sit down with many of our clients and go through the financial performance of their business. It’s a time to understand and reflect on a client’s historical performance, and then use that information to look forward.

When we go through a client’s financials, one area they often find confusing is understanding why the numbers in a profit & loss statement are different to a cash flow statement. Clients sometimes ask, ‘You are saying my business is profitable, but I have no cash in the bank. How can this be?’. In this blog post, we look at some of the key reasons why the two statements often show different amounts.

(1) Income on the P&L Statement

  • Sales invoices

Income is generally recorded in the P&L statement when the work is performed and invoiced, not when the invoice is paid. This often causes big differences between income in the P&L statement and the cash flow statement, especially for clients who are not active in chasing up their debtors.

Example: You do some landscaping work for a client. You invoice the client once the work is done. This is recorded as income in your profit & loss statement at invoice date. If the client has not yet paid the invoice, no amounts would be showing in the cash flow statement.

  • Deposits and prepaid income

Sometimes businesses ask for a deposit from their clients before starting work for them. This often happens with new clients. When a deposit is received, the cash is recorded in the cash flow statement, but nothing is recorded in the P&L statement. This is because you have not yet done any work for the client, so cannot record any income. You are simply ‘holding onto’ their money.

Example: A new client approaches you to do some design for them. You ask them to pay a 50% deposit upfront. The deposit is recorded in the cash flow statement, but no amounts are recorded in the profit & loss statement.

(2) Expenses on the P&L Statement

  • Bills

When you receive a bill for a purchase you made, you generally record this in your profit & loss statement on the date the bill is issued. The bill is only recorded in the cash flow statement when you pay it.

Example: An electrician fixes some power outlets in your pub and issues you with a bill as soon as he finishes the work. The bill is not due for another 30 days. You record the bill in the P&L statement when it is issued, however nothing is recorded in the cash flow statement yet as you have not yet paid the bill.

  • Big purchases

Most asset purchases can be immediately deducted under the Government’s instant asset write off scheme. Under this scheme, small businesses can immediately deduct asset purchases of up to $30,000. However, purchases of $30,000 + cannot be deducted immediately. Instead, these purchases have to be depreciated and expensed over the useful life of the asset. This means that the P&L statement will show a much smaller expense than the cash flow statement in the year of purchase.

Example: You purchase a machine for your engineering company. The machine costs $100,000 and has a useful life of 10 years. In your P&L statement, you record a $10,000 expense each year for the next 10 years (i.e. $100,000/10 year useful life). However, in your cash flow statement you record $100,000 as a purchase when you buy the machinery, and no further amounts are recorded in the following years. This causes a huge difference in cash flow recognition, especially in the year the machine was purchased.

(3) Putting cash into the business / taking cash out of the business

This part starts to get a bit tricky and here at Dexterous we always ask our clients to let us know when they are thinking of depositing or withdrawing cash from their business. This is because there are different ways this can be done, which can have big implications on their tax bill. Generally speaking, if you deposit or withdraw cash from your business, this will impact your cash flow statement, but have no impact on your P&L statement.

As can be seen from the examples above, differences in the P&L statement and cash flow statement are completely normal occurrences in any business. However, big differences between these two statements can often highlight problems with a business.

Dealing with these issues before they surface into problems should be at the forefront of any business’ strategy, and is something the team at Dexterous can help you with.

Email us hello@dexterousgroup.com.au or schedule a quick appointment over the phone.