Tuesday, April 28, 2009

Profits vs. Cash

They are not the same thing. This may come as a surprise, but making a profit does not mean there is an abundance of cash to be had. Common misperception, and this is one reason why accoutants and bookkeepers come in handy. It's not just because we're so fun to have around, though that is a definite plus.

Did you end your year with a lot of inventory on hand? Inventory is not an expense, not until it's sold. So if you've bought inventory, you have an asset, and it'll stay an asset until you sell it. Until then, there's no expense, and therefore more profit. Perhaps you don't see it as a profit because you don't have the money to spend, but you spent it already, on inventory.

There are many reasons your idea of what you should show as profit and what you actually show as profit are different, and this is just one example. Look at your balance sheet. Look at what you paid for personal expenses out of your business account. We don't recommend you pay for personal expenses out of your business, but it does happen. Look at assets you've purchased.

It's like a puzzle, and you want to look at all aspects that make up the whole picture, or you're only seeing a part of the whole.