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Where did my Profit go?

Posted on November 5, 2014 at 1:44 AM
  -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. 

 




Categories: Accounts Receivables, bookkeeping, bookkeeping,Tax Returns,QuickBooks,Bank Reconciliations,bookkeeping services,small business, Cash flows, profit making, QuickBooks Software, Tax Returns, Tracking your expenses

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29 Comments

Reply Patricia Berry
7:41 AM on November 12, 2014 
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.
Reply Denise Kennedy
8:59 PM on November 12, 2014 
well written article.
Reply Charles
9:12 PM on November 12, 2014 
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!
Reply Thomas King
1:10 AM on November 13, 2014 
I believe that every person, that is not in the accounting department asked this question.

Excellent post.
Reply Israizae Linaz
1:14 AM on November 13, 2014 
Excellent Explanation for a very interesting question, asked by all Business Owners.
Reply Christie Lamber
1:19 AM on November 13, 2014 
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.
Reply Donna Febus
2:35 PM on November 13, 2014 
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.
Reply Rosemary Anyanwu
3:37 PM on November 13, 2014 
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.
Reply Martha Halvorsen
4:02 PM on November 13, 2014 
Wow! Excellent, simple explanation to a question asked by almost EVERY client or Owner of the businesses I've worked for. Thank you!
Reply Barbara Green, Blue Ray Inc.
9:08 PM on November 13, 2014 
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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Steinfeld says...
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Thank you for appreciating and sharing our Blog on your network; We are really excited to know that you learnt a lot from this, I hope that you are also putting them into practice.
My Goal is to continually educate and enlighten everyone on how to reach their financial Goal and achieve the optimum in their financial level in Life. I am glad that this is really been achieved. Keep Checking back for more updates. And Be sure to keep Sharing. Thanks.
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5:35 PM on December 29, 2016 
Steinfeld says...
That is really interesting, You're an overly professional blogger.

I have joined your feed and look forward to looking for extra of your wonderful post.
Also, I've shared your web site in my social networks

Thank you for appreciating and sharing our Blog on your network; We are really excited to know that you learnt a lot from this, I hope that you are also putting them into practice. My Goal is to continually educate and enlighten everyone on how to reach their financial Goal and achieve the optimum in their financial level in Life. I am glad that this is really been achieved. Keep Checking back for more updates. And Be sure to keep Sharing. Thanks.