Embarking on a business venture is a rollercoaster journey filled with highs and lows. A common challenge that new entrepreneurs face is the discrepancy between projected profits and actual cash on hand at the end of the fiscal year. This guide is designed to help you uncover the hidden sources of your missing revenue and address any financial concerns.
Possible causes of missing profits
There may be several reasons why your business has shown good performance throughout the year, yet there’s little cash to show for it in the end. Here are a few possible places your profits could be lurking:
- Unsettled debts: Some of your customers might have acquired your products or services without paying yet.
- Inventory: Your profits might be tied up in unsold stock or raw materials, especially if you buy in bulk.
- Asset acquisition: If you’ve purchased new assets like a work vehicle, these expenses are depreciated over several years and not all claimed in the year of purchase.
- Owner withdrawals: Balancing the amount of profit you withdraw from your business for personal use can be tricky.
Navigating financial statements
Understanding your profit and loss statement is crucial in assessing your financial standing. It details your business’s income and expenses for a specific period, regardless of whether these transactions have been finalized. This includes sales or purchases made on credit, which can result in a discrepancy between your reported profits and actual cash reserves.
Bridging the gap
To bring your financial statements closer to your actual financial situation, regularly review your debtors. Vigilance in following up payment requests and taking action for late payments is essential. Additionally, using a cloud-based accounting system to track transactions in real time can aid in timely decision making.
Dealing with creditors and debtors
Businesses often have customers who pay on credit, as well as suppliers who offer credit for purchases. This can lead to a time lag between the record of transactions and the actual monetary exchange, increasing the figures in your ‘Sales’ and ‘Cost of Goods Sold’ (COGS) categories while your bank account remains stagnant.
Understanding COGS
COGS represents the direct costs involved in creating or acquiring the goods you sell to customers. This includes the initial inventory, purchases made during a specific period, and the inventory left at the end of that period. Other costs like freight, storage, and factory overheads could also be included.
The role of reinvestment and owner withdrawals
In a bid to expand their operations, businesses often reinvest their profits. This reinvestment could take the form of increased stock, debtors, or capital expenditure. On the other hand, excessive withdrawals by the business owners can restrict growth and deplete cash reserves. It’s essential to set sound budgets for each owner to prevent drawing too much profit.
Managing the financial aspects of a business venture is a complex and challenging task that requires careful attention to detail. By understanding the possible reasons for missing profits, navigating financial statements effectively, and addressing issues with debtors and creditors, entrepreneurs can bridge the gap between projected profits and actual cash reserves. Additionally, maintaining a balance between reinvestment and owner withdrawals is crucial for sustainable growth and financial stability. With vigilance, proper budgeting, and strategic decision-making, entrepreneurs can navigate the highs and lows of their business journey with confidence and success.
The Bottom Line
Managing the financial aspects of a business venture is a complex and challenging task that requires careful attention to detail. By understanding the possible reasons for missing profits, navigating financial statements effectively, and addressing issues with debtors and creditors, entrepreneurs can bridge the gap between projected profits and actual cash reserves. Additionally, maintaining a balance between reinvestment and owner withdrawals is crucial for sustainable growth and financial stability. With vigilance, proper budgeting, and strategic decision-making, entrepreneurs can navigate the highs and lows of their business journey with confidence and success.
Contact us for a deep dive into your financials.