3 places your profit might be hiding
“Where did the profit go?”
I hear it almost every day from the businesses I work with.
Followed quickly by: “How did I make that much?” and “Why isn’t there more in the bank account?”
You, like most business owners, are used to working hard and are good what you do but, when it comes to business finance, you’re a great … (insert your trade here!).
So when it comes time to take a look at your profit and loss it’s often a surprise to see how much you’ve made. You’d like to know where it went, right?
Typically, profits may be hiding in the following three places:
1. In the business
All businesses, but especially new or growing businesses, require investment in equipment, tools and materials. It’s often quite hard to obtain finance so it’s tempting to dip in to the business cashflow.
Answer these questions to find where the money could have gone:
- Did you buy any assets or equipment during the year?
- Have you increased the amount of stock or materials that you’re holding?
- Do customers owe you more than last year?
- Have you paid off any debts (e.g. banks, credit cards, suppliers or the ATO)?
Taking a close look at your business’ balance sheet will show changes to help identify this.
2. Living expenses
We understand the excitement of checking the bank balance and seeing money there … and then the thought process of ‘how can I spend that’?! As a business owner it’s easy to fall into the trap of drawing money from the business when it is there rather than being on fixed drawing amount each week which is in line with your living requirements.
Unless you have prepared a budget or have regular drawings, you might not realise how much you’re spending on your lifestyle – house, cars, kids’ activities, holidays and all the other expenses that seem to crop up.
If I asked you to estimate how much you’ve drawn out of the business in the last week, month or year, what would you say? Without a fixed or regular drawing amount, we can almost guarantee you’d underestimate!
Here’s what you’ll gain by setting a fixed amount to draw from the business:
- An easy guide to see if the business is profitable enough to meet your needs
- Excess funds can build up in the business and be used as a ‘buffer’ in tight periods or even withdrawn if required.
I can hear the moans already.
For any profitable business, taxation can be a cashflow challenge that should be budgeted for; firstly on a personal level and secondly (depending on your business structure) by the business itself.
Avoid that sinking feeling you get when you make it to the end of preparing your BAS or tax assessment only to discover that Mr Taxman has his hand out and there’s nothing in the coffers to give him. Put aside a percentage (ask us for a guide) of each drawings into a savings account and it’ll be there ready when the time comes.
Consider carefully what you’d do with any surplus funds to make sure that you have the money for business taxation commitments when they fall due … just because you have money in the bank account doesn’t mean that you should finance a vehicle or equipment … some of this money may be needed for tax.
By keeping an up-to-date accounting system, taking the time to review your financials or speaking to your accountant will help you understand where the profit is hiding.