-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.