Profit is what being in business is all about. It’s what we all work so hard to improve and to grow. Congratulating clients on the great profit they’ve made so far this year is a highly enjoyable part of what I do.
Invariably though, the next question is: “So, where is it?”
Most business owners understand what the Profit & Loss Statement is and what it shows (albeit to different degrees). Essentially, the profit figure on your P&L is the end result of revenue less expenses. It shows how much revenue has come in, what expenses are required to run the business and how sufficiently revenue has covered the expenses.
On the other hand, not so many business owners know what the Balance Sheet is all about nor the essential information that it can tell you. The Balance Sheet holds a lot of answers about the health of the business and it also shows where the profit has disappeared to.
2 of the usual suspects…
Profit often gets “caught” in a business in a number of ways (good & bad). Here’s the common 2 culprits of tying up profit in a business:
Debtors: The business may be making great sales, revenue is growing and things look good on the P&L. If the Debtor balance grows relative to the growth of sales, than in most cases the cashflow of the business will track along fine. However, perhaps insufficient Debtor Management practices are in place and customers are taking too long to pay forcing the Debtors balance to increase significantly in proportion to sales growth. Slow paying customers and poor Debtor management unnecessarily ties up cash. It’s imperative for good business that invoicing is done both correctly and timely and that a system is in place to routinely follow up customer payments.
Stock: Businesses with stock need to have sufficient practices in place to ensure cash/profit isn’t excessively tied up in stock on hand. If your stock purchaser is buying overs, or buying the wrong type of stock that isn’t selling or stock that isn’t required, then you are unnecessarily tying up cash in stock that could be used for something else.
If you would like to better understand your Balance Sheet and where your profit may be hidden, please get in touch today.