Why is my profit different from my bank account?
We get asked a lot by our clients why is my profit different to my bank account? Many of our clients have quite a few concerns with their finances when they start to work with us. They want us to help them get better control over their business.
We have created a series of posts that will help you find out the differences and calm your doubts.
Profit is the difference between what you sell and what buy
Profits is the money that you make from the work that your company does. The profit is the difference between the amount of money that your company charges and what you pay out. The amount that is left is profit.
This profit does not actually need to be paid out of the bank account during the year; it is just the fact that it is earned during the year. For instance, you may send an invoice that is not paid for a couple of weeks or months. You have still made that profit, but the money has not actually been paid into your bank account.
Profits will tell you how well your business is doing
The profits are the money that the company pays taxes on. It is an important number to calculate because it indicates how much money will be paid into the account and if the company is making money.
Cash is the difference between what you spend and what you receive
The money in the bank is the difference of the money that you have been paid less what you have paid out. It is the amount of money that is left in the bank account. It is important to realise that this money may be needed to pay bills and tax so it is not all the money that you can pay yourself.
The cashflow is the point when what you sell and buy hits the bank account
When we talk about money going into and out of the account, we call it cashflow, simply the cash that flows in and out of the bank account.
You need good cashflow to pay the bills
This is important to know because it tells you if the company can pay its bills. If there is no cash in the bank account and you have a tax bill to pay it will be a problem!
It is possible to try to predict what the cashflow will be in the future. We call this a cashflow forecast, that is we forecast cashflow.
Forecasting will let you see into the future. It’s like magic!
This is really cool, because it helps you see what you will need to pay out in the next few months and what you expect to receive. Once you see that you can see if you will run out of money or if you have spare cash to put back into your business. it’s like looking into the future. But this is not based on just a hunch or guesswork, it is based on solid accounting principles.
The reason that the money is different from the profit is that there will be invoices and expenses in the accounts that are not yet paid. They are invoices for work and bills for expenses that you had during the year, but the cash is different because we have not had the money in the bank.
You need to do look at both profits and cash to see how your business is doing
If you want to get a picture of where your business is, we need to look at both the profits in the accounts and the cash in the cashflow forecast. When you look at them, you can see how much money you are making and if you have the money or will have the money to pay all your bills.