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The Difference Between Profit and Cash - Able Accountants

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able accountants walsall cash profitIn the accountancy world this is a lot of talk about “profit” which is perfectly understandable since this is one of the main reasons the industry exists. While accountancy exists to identify where a business is making or losing money the business itself exists to generate profit. This profit may eventually be turned into hard cash to be used but it is important to remember that “profit” and “cash” are two entirely different concepts.

Your accountants work to highlight the profit or loss generated by your business as well as any assets or liabilities. The accounts should show all this in an easy-to-digest way that will make the bottom line easily visible and understood within a standard framework. There are international standards to which accountants can adhere to make the process easier when comparing and contrasting the details from one set of accounts from one country to those from another country. This is especially helpful if you have international branches or are simply looking to compare your company to one in another country.

Also this is helpful for submitting accounts for scrutiny by institutions such as Companies House, HMRC and banks. Anyone looking to ascertain the value of your company with a view to buying it or offering a loan will also want to see a set of up-to-date accounts showing the relevant information as readily available. Any good accountant will be able to provide this service in a standard format. Other less familiar standards or alternative ways of presenting the figures may be viewed by those concerned with the suspicion that you are attempting to obfuscate and hide the data.

A standard protocol can be very useful for businesses with a larger turnover with the more important data can easily be highlighted and imported to other reports and summaries. The information can be easily assimilated to show how tax has had an impact upon the profit margin or how the value of assets has been affected by depreciation, for instance.

However, businesses with a smaller turnover and workforce may be in a position where the figures on the page can really represent real-world cash. For such businesses it is entirely conceivable that there can be the amount of money in your account that is being shown in the bottom line of your accounts. On the other hand it can be a similar scenario as with larger businesses where the accounts may show profit but you may have no money readily available at the bank. Or your accounts may show a loss on paper but the bank statement shows that you have funds you can use.

If you are facing one of these scenarios you should contact your accountant and ask them to decipher the accounts. With their help you should gain a better insight and be able to not only understand their work but also understand your business. It may not necessarily be that your accountant is not being open or doing a bad job, they just need to help you to understand the lines of income and expenditure and be able to explain the cash-flow in your business.

It is often the case that simply following the money you can find the profit. Perhaps clients have yet to pay invoices. If this is the case, simply put some credit control measures into practise and send some reminders. This outstanding amounts can be included in your accounts but may not have actually been paid into the account and be available as disposable funds.

Perhaps you have had to pay some suppliers in advance for assets or services you are yet to receive. For example you may have had to pay for rent with a few months in advance, therefore your accounts are showing that three months of rent has left your account in one transaction. This is a common scenario and all you have to do is account for this in an appropriate way in your accounts.

It may be the case that you have outstanding invoices from suppliers. So your accounts will show that you have more money in the bank than you actually do. Once you pay the invoices the amount of excess money will reduce accordingly.

In conclusion it is a good idea for your accountant to adequately explain to you the difference between profit and actual cash in the real world.

Contact Able Accountants today for more help and advice.

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