As Owners, we wonder why we cannot seem to get hold of our true profit number. Why don’t the numbers add up?
One of the most common statements I hear from Business Owners is, “I see that I made a Net Profit of $50K, but where is the $$?” We have in the past, (if you follow my blogs) discussed the topic of Profit. This seems to be the greatest area of confusion and mystery in Businesses.
We agree that making a Profit is a good thing and a negative profit (Loss) is not a good thing. Which is where the mind game begins. Why is there a Profit, but no money in the checking account? Do you also wonder why you don’t go belly up when your Profit & Loss Statement keeps showing a negative profit (Loss)? Is your company merely a cash flow business?
The most important fact to remember about Profit, is that Profit has no connection to how much Cash is in the bank. Your Profit and Loss Statement (P&L) reflects the transactions that occur within your payment method during each month. In basic terms, the total money deposited minus any COGS (what it takes to be able to produce the income-IE: Cost of Goods Sold/products) is your Gross Profit.
The Operating Expenses, what I refer to as the cost of making your business run (rent, payroll, office supplies), is your Total Expenses. The difference between the two is your Net Income (or Loss).
I refer to this equation as ‘pure money in’ minus ‘pure money out’. The difference makes up your Net. By ‘pure money’ I am suggesting there is not value in it for the purpose of company valuation. Again this is in very basic terms. Some business analyses would debate my statement, but it works for the point of this blog.
For the sake of this explanation, let’s say you are a cash basis company. If you don’t know what ‘basis’ you are, or what this means, I will blog about the topic in the future. For a quick answer, ask your CPA when you go in for your tax planning session. You need to know this for proper growth decisions.
- Income: An invoice of $3,000 is created.
- P&L reflects this in your income. This now is $3000 Profit/Income, even though no payment has been received, thus not deposited in the bank.
- Expenses: You pay, rent, office supplies etc.
- P&L indicates your Operating Expense is increased (accumulates, totaling the cost of keeping your doors open, cost of doing business.) This of course depletes your checking account when the payment is recorded by the bank.
- Your P&L is reflecting both types of transactions. However, your Bank account does not.
- You have not received the payment from your customer so the checking account does not reflect that deposit. However, the payments are deducted from your checking account balance. Thus, the difference in your Net Income (Loss).
- Loan Payment-The interest paid is reflected in the Expense section, while the Principal is deducted from the loan-liability. Only the Interest is reflected on the P&L even though a portion of your Profit was absorbed/reflects the principal. The Principal payment is reflected on the Balance Sheet.
- Income: An invoice of $3,000 is created.
Your P&L only reflects income and expenses. This does not reflect liabilities (IE Loans, Taxes, etc.), nor Distributions or large Asset purchases.
There is no magic number trick or tom foolery going on. A simple understanding of how the transactions that occur in your business effect your Profit & Loss Statement, as well as your Balance Sheet. Beware, you can be ‘profitable’ and still be broke. Turning profit into value in the company is key to managing your Net Profit Balances. The goal is to have people on your Team that can help make sense of the reports, so you can manage your business, sell your product and service more strategically and make better financial decisions.
A little more about us:
OrganizerForU is a Bookkeeping and Business Process Organizing Team. The OrganizerForU Team can help assess, implement and transform your business, your books and your life! The majority of our services assist in the areas of bookkeeping departments, because we understand that is the hub of a business.
OrganizerForU works with Clients to Guide or Assist or Manage in all areas of bookkeeping.
We want to empower YOU, the business owner, to work on bookkeeping as much, or as little as you want to! We will work within your budget and time frame, whether on a short-term or on-going basis.
We Guide! Just call us when you need us. We can do on-going training sessions or further your process development as your company grows.
We Assist! We work with you on a predetermined schedule to keep your bookkeeping current and accurate.
We Manage! We will set a schedule that best serves your business needs and manage the bookkeeping for you. Now, you can spend time doing what you do best…making your business successful!
If your business bookkeeping system is less that desirable, or you lack processes for checks and balances, or if your current system just isn’t working, Tammy can help. She will meet your right where you are at. Check out our website and click on the SERVICES tab to see what we can do for you. Don’t dread your bookkeeping any longer. Contact us today!