How Can You Be Making A Profit But Not Have Any Cash?

How Can You Be Making A Profit But Not Have Any Cash?

As a tradesman or small business owner, you might wonder how you can make a profit, yet still have no cash available. It’s a common concern, and I’m here to simplify the explanation.

Let’s say your profit and loss statement in Xero or another accounting system shows a profit, but your cash is low. The reason for this disconnect is that your profit and loss statement doesn’t include certain essential factors that impact your cash flow. These factors are:

Taxes: Any taxes you pay, like instalment tax or withholding tax, don’t show up in your profit and loss statement. This means the money goes directly out of your account.

Debtors: If you have unpaid outstanding invoices from completed work (receivables or debtors), it can tie up your cash. Even though you’ve earned the money, you haven’t received it yet.

Loans: Payments for loans, like those for excavators, trucks, or vehicles, don’t appear as expenses in your profit and loss statement. They go towards reducing your debt, which affects your cash flow.

Stocks: Buying more stock than before can also reduce your available cash.

So, while your profit may look good on paper, these factors can affect your actual cash flow. Remember, most trades businesses use accrual accounting, meaning income is recorded when the work is done, not necessarily when the money is received.

If you need more information, I have other videos that explain profit and loss in greater detail. Feel free to check them out!

More tradie tips can be found in my free book “The Wealthy Tradie Book 2- How To Make Your Business Rake In The Cash”, you can grab a copy by following this link. Or you can book a free strategy session here. 

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Hugh Bowman is a specialist in business coaching for trade businesses and is a former engineer and technical expert. He has lived and worked in many parts of regional Victoria coaching tradie business owners.

Ph: 0409 402 474