Profit Rich, Cash Poor: A Crisp Accountancy Perspective

Where Did All the Cash Go?

Have you ever wondered why a profitable month doesn’t reflect in your bank balance? Let’s delve into an example to clarify this common conundrum.

Case Study: CreativeWeb Solutions

CreativeWeb Solutions, a digital agency, offers web design, SEO, and digital marketing services. Here’s a simplified Profit and Loss (P&L) statement for July:

• Sales: £50,000
• Cost of Goods Sold (COGS): £20,000
• Freelancer Fees: £10,000
• Advertising Spend: £10,000

Gross Profit (Sales - COGS): £30,000

• Overheads: £16,000
  • Operating Expenses: £15,000
  • Depreciation: £500
  • Interest: £500

Net Profit Before Tax (Gross Profit - Overheads): £14,000

A quick look at the P&L might lead one to believe the business had a great month. However, the cash flow statement tells a different story.

Cash Flow for July

• Starting Bank Balance: £40,000

Cash Inflows: £20,000

• From last month’s sales: £5,000
• From this month’s sales: £15,000

Cash Outflows: £66,000

• Freelancer Fees: £12,000
• Advertising Spend: £10,000
• Operating Expenses: £18,000
• New Laptops for Staff: £5,000
• VAT Due: £9,000
• Loan Repayments: £2,000
• Owner’s Dividend: £10,000

Closing Bank Balance: £-6,000

Despite a £14,000 profit, CreativeWeb Solutions faced a negative cash flow of £26,000, ending the month with a £6,000 overdraft. So, where did it all go wrong?

Key Factors Affecting Cash Flow

1. Payment Terms: Only 25% of sales are paid upfront, with the rest due the following month. Low sales last month meant less cash this month.
2. VAT: The P&L shows net figures, but VAT needs to be paid on sales and expenses. This month, they collected VAT on only 25% of sales.
3. Capital Expenditure: The £5,000 spent on laptops is recorded as depreciation over three years in the P&L but affects cash flow immediately.
4. Loan Repayments: Only the interest appears on the P&L, while the principal repayment impacts cash flow.
5. Quarterly VAT Payment: VAT was due this month.
6. Owner’s Dividend: The decision to pay a £10,000 dividend based on profit overlooked the cash flow situation.

Bridging the Gap Between Profit and Cash

The disparity between profit and cash is significant. Profit can be adjusted through accounting policies, but cash is tangible and accurately reflected in your bank balance.

At Crisp Accountancy, we help you navigate these complexities. Remember, your profit is an accounting construct, while your cash flow is the lifeline of your business. Let’s ensure your business remains cash-flow positive, even when it’s turning a profit.

Get in Touch

For tailored advice and comprehensive financial management, contact us at Crisp Accountancy. Together, we’ll turn your profitable months into positive cash flow experiences.