John’s business has just declared £103,000 net profit, before tax.

BUT.

There’s no money.

John is frustrated, some might say, angry.

How can his business be this profitable but he can’t afford to take his family on holiday.

John only draws £3,000 a month from his business.

To compound the issue he now has to find the money to pay the £14,630 tax bill, which is due in two months time.

John asks his accountant, Jason, to explain.

Here’s what he said.

John, I know it’s frustrating but remember; profit and cash are not the same thing.

Your profit has to pay for other items that are not shown in your profit & loss account.

Like what ? asks John

Well, for starters your dividends.

Then there’s your loan that you took out during COVID, the repayments are just shy of £2k a month.

Don’t forget the new van , which you pay for on HP finance at £500 per month.

There was also last years tax bill, you used profits made this year to pay for that, as you didn’t have the money set aside last year.

John pauses, then starts to jot some numbers down on his notepad.

He looks back up at Jason and thanked him for explaining, but we’re still short he said, where is the rest!

In other people’s bank accounts, replied Jason.

John looked slightly confused.

Your trade debtors (the money owed by your customers) is constantly rising, said Jason

So; the sales made (invoices raised) show in your £103,000 profit but the cash hadn’t hit your bank account for some after that, some of it is actually still outstanding.

John lets out a big sigh, puts his hand on the back of his head and leans back in his chair.

Ah, I get it, that makes sense.

We’ve been so busy for the last few months I’ve just not had chance to chase the money.

I’ll make this a priority, when I get back to the office.

John thanks Jason for the explanation, and leaves.

At least now he understands and can already see some quick fixes, i.e. tightening his credit control systems (getting paid quicker).

Also, the loan only has a couple of years to run and has helped him to improve and grow the business.

Finally, the business is profitable, which is fantastic and he knows he can increase this further.

He’s feeling so much better about his business and future ahead.

The story above is fictitious but its based around hundreds of conversations I've had with business owners over the last 20 years.

Understanding the difference between profit and cash is crucial to success of your business.

To your financial success!

Karl