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Why is there a difference between my Profit and Loss Statement and my cash flow?

September 27, 2011 By Leave a Comment

The most confusing area for small business owners can be understanding what is actually happening in their accounts.

Product based industry

The biggest challenge that product based industries face is the actual product they sell – stock. The key element to understanding the difference between your profit and your cash flow lies in a number of variables:

  • How long you are holding your stock
  • How long it takes you to pay your suppliers for that stock
  • How long it takes you to get paid by your customers for that stock

Your Profit and Loss Statement shows purchases and sales. It records the sales transaction, but it does not record how long you are holding the stock item, how long it takes you to sell that specific item or how long it takes your customers to pay you. That is all shown through your bank account. Your bank account is your cash flow and this reflects the real transaction. These variables have the biggest impact in terms of the differences you will experience.

Service based industry

For service based industries the theory is essentially the same, as the challenge lies with your ‘stock’, that is your time. The variables you need to consider are:

  • How long you are keeping work you do for clients in a ‘work in progress’ state
  • How long it takes you to charge out your time
  • How long it takes you to pay your suppliers (i.e. contractors/staff)
  • How long it takes for your customers to pay you

General considerations

Identifying payments that go through your bank account that are not captured on your Profit and Loss Statement impacts all industries. Often small businesses don’t understand what these are. When working out differences, be sure to include the ‘off P&L’ items such as:

  • Loan repayments
  • GST payments
  • PAYG payments
  • Other Tax Office payments
  • Hire-Purchase payments
  • Business owner drawings (if you are not paying yourself a salary/wage through your payroll)

These items are not allocated to your P&L Statement/Report, so if you draw from your P&L and deduct these items you should be able to get a reality check in terms of what is truly happening in your business. To get the real picture you need to look at all these factors, not just your P&L in isolation.

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Management Tagged With: , , , , , ,

Choosing accounting software for your business

September 6, 2011 By 1 Comment

Choosing accounting and data entry software for your business is much the same as choosing a car. Some people prefer Fords, some like Toyotas, but what it comes down to is your preference. Accounting and data entry software is no different. It is a preference for the business owner and what works for you. There are many cloud based software solutions available with a range of features and benefits:

  • the software allows everyone to work on the same file at the same time
  • as a business owner, you can carry on with business (if using a Point-of-Sale system) while your bookkeeper or accountant accesses the system or enters data
  • simultaneous use of files and data without interruption
  • consultants can access information from anywhere
  • there is no confusion regarding the latest backup
  • it is easy to use

I personally like cloud based software as it means I can access detailed information without interrupting your business.

When choosing accounting and data entry software remember that there are many available and some are marketed more than others, but this doesn’t mean to say they are necessarily better. You really need to find what will work for you in your business and also consider what your bookkeeper and accountant prefer.

Filed Under: Accounting, Business Financial Mangement, Cash Flow, Financial Management Tagged With: , , , , , , , ,

How to understand what your accountant is saying!

August 30, 2011 By 1 Comment

All professions have their own jargon and accountants speak a language foreign to most business owners called ‘accountanese’. Just the same as website designers and IT guys speak a language I call ‘ITgeekspeak’.

Do you sometimes feel overwhelmed when you leave your accountant’s office thinking, ‘Why can’t they just speak English?’ You have just spent an hour or so with them and you still have no idea where your business is actually at.

If you have ever experienced this feeling here are some tips to remember for the next time you meet or speak with your accountant and they are not speaking your language:

  • Tell them to STOP
  • Ask them to speak in layman’s terms
  • Ask for answers relevant to your business
  • Ask questions that will give you the information you need for YOUR business

Business owners do not necessarily want nor need to know what the ‘return on equity’ is, for example. There are a myriad of accounting ratios that indicate performance; however, they do not tell you what profit you are really making, what your profit is this month compared to last month or to the same time last year, what your cash flow looks like, why there is a difference between your Profit and Loss Statement and what is happening in your bank account, or whether your staff are performing efficiently and are bringing in enough revenue.

You need to ask your accountant how long it takes for you to get money in from your clients or customers, and how long on average it takes for you to pay your suppliers. These are questions that are paramount to understanding cash flow in your business. Questions like these are simple for your accountant to answer.

The best form of advice I can give you is: Ask specific questions related to YOU and YOUR business; don’t ask for general feedback. Think about the specific pain areas that you are experiencing in your business and the challenges you are facing. Asking specific questions directly related to your business will help your accountant identify the exact information you are looking for. With accurate, plain English answers in hand, you will be able to make the necessary changes that will improve your future profit and loss and the performance of your bank account!

Filed Under: Accounting, Cash Flow, Financial Management Tagged With: , , , , , , , ,

How to choose a good bookkeeper

August 23, 2011 By 1 Comment

In any business, the bookkeeper is the source of all information relating to the business’ performance. So, if you have a bookkeeper who is not allocating expenses correctly or is not accurately keeping track of everything within your business then the information you draw out in terms of your Profit and Loss Statements and other reports is pretty much useless. As the business owner, you have a responsibility to make sure that your bookkeeper is doing what they need to and that they highlight anything else that is important to your business.

How?

Ask your bookkeeper or prospective bookkeeper lots of questions. You need to find out what type of clients they are currently working with and what type of clients they have worked with in the past. You also need to know whether they usually work with home based and small businesses or if they have larger companies on board.

Secondly, ask them to produce a specific report for you. I would suggest your Profit and Loss Statements for the last three years. Then ask them to explain this report to you. Ask questions based on the report and make sure the bookkeeper is comfortable providing you with correct answers. Ask them for their opinion on your business’ performance, what your gross profit is and to provide comparisons from year to year and the like.

If your prospective bookkeeper or current bookkeeper can easily produce reports and answer these types of questions then this bookkeeper will not just enter data. Anyone in your business can punch the numbers into the system and allocate them to a specific spot. However, if they do not understand why the numbers are being allocated to specific places or what they are allowed to claim in terms of GST and tax, they may not feed the correct information into your software and you won’t receive the correct information in your reports.

Finally, you need to ask for referrals and/or the contact details of the accountants of the clients your bookkeeper is currently serving. As a bookkeeper the information they feed into the system feeds down to the accountant, so their clients’ accountants should be able to tell you if the information they are receiving has been correct and reliable for that specific business.

Filed Under: Accounting Tagged With: , , , , , , , ,

Will Your Customers Pay You?

July 30, 2010 By Leave a Comment

-  The failure rate for firms with a negative cash  flow is 214% higher than those with a positive cash flow.

-  More than 80% of business failures are related to cash flow pressures rather than general business performance or poor sales.

-  Smaller firms (those with up to 20 employees) are more likely to experience a negative cash flow compared with their larger counterparts

Thanks to an article in the Weekend Australian: 27/03/10, which quoted a study on cash flow, conducted by Dun & Bradstreet.Will Your Customers Pay You?

If your business has been fortunate enough to incur no bad debts consider yourself very lucky – and unusual.

You are in a minority.

Lauren Ross from EC Credit control says…

“When referring to Bad Debt in small business, we don’t use the “IF” word, it’s more a case of “When”. Bad Debt can happen to even the most vigilant of business owners/managers.”

One of the ways small business owners can “insure” their cash flow coming in, is by implementing “Terms of Trade” into their customer contracts.

What can you do, without Terms of Trade in place, if your customer decides not to pay you?  Very little indeed.

Can you:

- give your debtors a bad credit rating;

- make your debtor liable for all debt collection costs;

- take a mortgage or security over your debtor’s assets;

- limit your own liability to the costs of goods or services you provide?

TERMS OF TRADE will allow you to do this and more……

Thank you Lauren Ross of ECControl for this valuable information.

If you would like to know more about “Terms of Trade”, please control Lauren Ross directly on 0419 195 599 and mention this article.  You can also take a look at their website: www.eccreditcontrol.com

Filed Under: Cash Flow Tagged With: , , , , , ,
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