Where has all the profit gone?


" If I'd made that much profit, I'd have more money in the bank, wouldn't I?" , the client said, surveying the impressively profitable accounts laid before him.

" Er...., well no, not necessarily, actually", replied the accountant who began to explain the reasons.

Accountants deal in profits and losses, not cash received and cash paid. Sales are recognised when invoices are raised, not when they are paid which can be several months later. Purchases of capital items such as machinery or cars are not treated as costs in the profit and loss account; they are assets to be shown on the company's Balance Sheet.

Understanding the link between profit and cash flow is crucial if an expanding business is to survive what may be a roller coaster in its first few years. It is easy to lose focus on that link and be drawn into a spiral of cash flow problems even in a business where the underlying trade is profitable. Once in, it is difficult to break free from the spiral.

Cash flow issues become all consuming, meaning that management time is taken from carrying out other crucial tasks. A fire fighting mentality creeps in, errors increase, customers lose confidence and staff morale falls. Company restructure can be the only solution.

Good advice should help prevent this doomsday scenario. It is crucial that management are given the information that they need, not bland accounting information designed for the 'average' company which of course doesn't exist.

Cash-flow forecasts and advice on methods of financing expansion are also critical. By drawing attention early to how tax and VAT issues affect finance decisions, managers will be able to avoid costly mistakes.

With the possibility of a global recession increasing a sound understanding of business finance is crucial for survival.