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My Blog

Where did my Profit go?

  -Understanding the Myth of Profits.

  As a Business Owner, Have you ever wondered why you cannot seem to get hold of your profit? Most Business Owners ask the question....." I see that I made a Net Profit of $XXX, but where is it? ".We have been looking at the topic of profit making, and this topic is a great mystery in Businesses.
  We agree that making Profit is a good thing and a negative profit (Loss) is not a good one; however, the mind game begins when there is profit, but no money in the Checking account. Do you also wonder why you don't go out of Business, when your Profit & Loss Statement keeps showing a negative profit (Loss)?
  The Answer is simple: PROFIT IS NOT CASH.

  The most important fact to remember about Profit is that, Profit has no connection to how much Cash is in the bank. A Profit and Loss Statement shows the movement of transactions, which occur in your Business for any given period (monthly), and the total net effect of these transactions constitute the balance that you see on your reports.
   An Example is when you enter a Business transaction, and an invoice amount of $3,000 is created in your Books, your Profit and Loss Statement shows the Sale and Resulting Net Profit, but there is NO CASH, until the invoice is paid; this money remains in your Account, only for a period of time, because when you pay your vendors or make your Bill Payments/Loan Payments, the money is being used up.
  Let's take a Loan Payment as another example; Most Business Owners forget that only the interest portion of a Loan Payment appears on a Profit & Loss Statement, while the Principal portion of the transaction occurs on the Balance Sheet. In this case, another portion of profit has been used to pay the principal.

  In conclusion, It's not Magic...........It's just having a basic understanding of how transactions occur in your Business and its effect on your Profit & Loss Statement, as well as your Balance Sheet. The Ultimate Goal is to make better financial decisions. However, take Note, You can be profitable and still be broke (Did I hear someone scream?). Turning Profit into Cash is the secret to managing your Net Profit Balances.

   Our Next Newsletter will feature, how you can turn your Profits into Cash; if you need help with understanding your financial reports, why don't you give us a call? We would be glad to help you. 

 





27 Comments to Where did my Profit go?:

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Patricia Berry on Wednesday, November 12, 2014 2:41 AM
Great Topic, Great Site. Thanks for sharing, I am so elevated by this topic, this is what I have been trying to understand; Thanks for simplifying this myth of Profit. I am now more enlightened and will surely apply it to my Business. Really appreciate this, Keep up the Good work.
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Denise Kennedy on Wednesday, November 12, 2014 3:59 PM
well written article.
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Charles on Wednesday, November 12, 2014 4:12 PM
Ah yes, the wonders of the accrual accounting system. The primary problem is a paradigm difference between realistic accounting practices vs what most non-accountants view as profit. As accountants we're taught that under the accrual system the transaction counts upon creation, while most business owners believe that the transaction isn't valid until they have cash in the bank (hmm...sounds like the cash accounting system....). Unfortunately, taxation rules require, in most cases, the use of the accrual system for reporting. The major problem that we, as accountants, face is one of educating our clients - something that may be resisted and unappreciated. This article makes a great step towards getting the "word" out to them. Good job!
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Thomas King on Wednesday, November 12, 2014 8:10 PM
I believe that every person, that is not in the accounting department asked this question. Excellent post.
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Israizae Linaz on Wednesday, November 12, 2014 8:14 PM
Excellent Explanation for a very interesting question, asked by all Business Owners.
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Christie Lamber on Wednesday, November 12, 2014 8:19 PM
This is a Very Good Article. It's not easy explaining the details of Cash flow and the Profit & Loss statements, but this article nailed it. Thanks for the Good Job.
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Donna Febus on Thursday, November 13, 2014 9:35 AM
Rosemary, this is an excellent article. I agree with you and the others. Perhaps one of the most difficult parts of our job is explaining to the client why they show a net profit but do not understand why that profit is not present as cash to use in their bank accounts. I have had many conversations with seasoned business owners about this very subject. Charles is also absolutely correct when he stated that non-accountant's view financials differently than we do. It is often difficult for the business owner to comprehend the process. Thank you for sharing, this is a great way to provide a understandable explanation for why the f/s appear as they do.
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Rosemary Anyanwu on Thursday, November 13, 2014 10:37 AM
I really want to thank every one of you for appreciating this article; I'm glad, it came in handy, especially, when we have a lot of Business owners, getting confused about, why they are not seeing their profits in their Bank Account, Feel free to forward this to them and spread the word; Also keep checking for more interesting articles. Thanks.
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Martha Halvorsen on Thursday, November 13, 2014 11:02 AM
Wow! Excellent, simple explanation to a question asked by almost EVERY client or Owner of the businesses I've worked for. Thank you!
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Barbara Green, Blue Ray Inc. on Thursday, November 13, 2014 4:08 PM
This is a very well written article and helps in understanding basic concepts. Looking forward to many more insightful articles. Thanks.
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