Unravelling the mystery of missing profits

Starting a business is a wild ride, filled with highs and lows. Among the challenges entrepreneurs face is the gap between expected profits and the actual cash available at the end of the financial year. This guide, brought to you by your trusted Wellington accountants at Affinity Accounting, aims to help you uncover where your seemingly elusive profits might be hiding.

Possible Causes of Missing Profits

Even if your business has demonstrated good performance, the cash may not always reflect that success. Here are a few areas where your profits might be hiding:

• Unsettled Debts: Some customers may have enjoyed your products or services without settling their accounts yet. Our Wellington based team of accountants suggest regularly checking your receivables to identify these gaps.

• Inventory: Profits can get tied up in unsold stock or raw materials, particularly if you purchase in bulk.

• Asset Acquisition: New assets, like work vehicles, are depreciated over several years. This means not all expenses are claimed in the purchase year.

• Owner Withdrawals: Striking a balance between personal profit withdrawals and business needs can be tricky.

Navigating Financial Statements

A key tool for understanding your financial health is the profit and loss statement. This document captures your income and expenses over a period, including transactions made on credit. Such credit transactions can cause a mismatch between the profit figures and actual cash in hand. Affinity recommends regular reviews to stay on top of these discrepancies.

Bridging the Gap

To align your financial statements with reality, regularly review your debtors. Be proactive in following up on payments and addressing late payments. A cloud-based accounting system, like Xero, can offer real-time transaction tracking, aiding you in timely decision making.

Dealing with Creditors and Debtors

Many businesses operate on credit—extending it to customers and receiving it from suppliers. This can result in a delay between transaction recordings and actual cash exchange, leading to inflated figures in your 'Sales' and 'Cost of Goods Sold' (COGS) categories without a corresponding bank balance increase.

Understanding COGS

COGS include the direct costs involved in producing or acquiring the goods you sell. This encompasses the initial inventory, purchases made during the period, and remaining inventory at the period's end. Freight, storage, and factory overheads might also be part of this calculation.

The Role of Reinvestment and Owner Withdrawals

Businesses often reinvest profits to grow, which can manifest as increased stock, debtors, or capital expenditures. Conversely, excessive owner withdrawals can hinder growth and drain cash reserves. We advise setting clear budgets for owners to avoid excessive profit draws.

The Bottom Line

If you find yourself at the fiscal year-end with profits but no cash to settle your tax obligations, don't panic. Delve into your financials to see if your cash is tied up in extra stock, debtor accounts, or new assets. Managing a business is a journey, and grasping these financial nuances will empower you to navigate it more confidently.

For a comprehensive financial review, reach out to your team of Wellington accountants at Affinity. We're here to guide you through every step of your entrepreneurial journey.

Contact us for advice specific to your situation.

Affinity Accounting is a team of Wellington Accountants who love to help small businesses realise their potential.

What our clients say

“We are so happy we’ve found a business accountant in Wellington that is approachable, professional, proactive and really takes the time to explain in a no judgement way how we can meet our obligations and improve our business finances. We highly recommend Affinity Accounting to any of our friends and contacts.”

-Steph Adriaansen-Fink