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As we enter a new financial year and I prepare financial accounts and tax returns for my business clients, a common comment I receive when reviewing their profit is “I didn’t make that much profit!” followed closely by “If I did … where did the money go?”

Like most business owners, you 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 actually made. I’m guessing you’d also like to know where it went, right?

Typically, profits may be hiding in the following three places:

1. Drawings (Tax and living expenses)

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.

As a business owner it’s easy to fall into the trap of drawing money from the business when it is there rather than drawing a fixed amount each week in line with your living requirements. We understand the excitement of checking the bank balance and seeing money there … and then the thrill of ensuing thought process of ‘how can I spend that’?! 

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!

By setting a fixed amount to draw from the business you’ll have an easy guide to see if the business is profitable enough to meet your needs, and enable excess funds to build up, ready to be used as a ‘buffer’ in tight periods or even withdrawn if required.

2. In the business – Assets

All businesses, but especially new or growing businesses, require investment in equipment, tools and materials. If your business assets have increased, the business profit may have been used for this, for instance:

  • Bank account – has the balance increased from last year?
  • Debtors – have you invoiced customer that haven’t paid yet? If so your profit is with them!
  • Inventory or stock – have you increased the amount you are holding?
  • Equipment – was any purchased that wasn’t financed? The funds to pay for these items will have to come from profits.
  • Investments – did you buy shares or other investments?

3. In the business – Debt Reduction

The repayment of debt is often a process that happens automatically ie loan repayments that are principal and interest. In order to achieve these debt reductions, the business will be required to generate a profit (if it is not selling assets); for instance:

  • Do you have bank overdrafts or credit cards that have been repaid or the amount owing reduced?
  • Have you repaid or reduced any debt to the ATO?
  • Have you repaid any equipment of asset finance?
  • Have you repaid or reduced any loans?

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!

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