A common issue that we hear is how can I be making a profit but yet I have no cash to pay myself and my bills.

The first thing to remember is that your profit does not equal your cash flow.  Your cash flow and your profit are effected by a lot of the same things but also a lot of different things.  

Profit is calculated by taking all of your sales and subtracting your businesses expenses.  The profit is then reinvested into the business or paid out to the owners.  

However, cash is used to fund the business for its day to day operations.  Cash can be as a result of profit, but cash can also be generated through other means such as: selling assets; borrowing funds from banks or other third parties; contributions from personal funds or getting people to invest in the business.

Example

Sales                                  $1,000,000

Less: Cost of Sales              $600,000

Less: Operating Expenses    $250,000

Equals: Profit                        $150,000

Less: Tax                              $42,750

Equals: Profit after Tax            $107,250

The first thing to note is that all items in the profit and loss are disclosed net of GST.  Therefore, the actual sales / takings in the above would be $1,100,000 and the cost of sales would be $660,000.  

It is more than likely that operating expenses include superannuation and wages which are exempt from GST.  

Superannuation is typically accrued so that what is shown in the profit and loss does not equate to what has been paid.

Furthermore, the sales will usually contain Debtors / Receivables, i.e. people that still owe you money.

The Cost of Sales and Operating Expenses may also contain Creditors / Payables, i.e., people that you owe money to.

If you would like to discuss further please contact us:
McNamara and Co - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandcompany.com.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.com
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