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Profit in your biz – but where is the cash?

Updated: May 19, 2023

This would have to be one of the most highly asked questions that we get asked as not nerdy at all super cool accountants and tax advisors and it's usually around the time we let you know the great news that you have a tax bill to pay and you swear black and blue that you never had the cash and you didn't spend it, you swear! 😉

Well the answer is actually simples ...

The cash has already been spent through:

  • repaying debt

  • purchasing plant & equipment (balance sheet)

  • stock purchases

  • personal drawings

  • paying taxes (GST, PAYGW, PAYGI, tax) OR

  • you have people that haven't paid you and you are being their bank (debtors)

So this is where you have to ensure you are reviewing your profit and loss statement AND balance sheet as together they tell you where the cash has been spent.

If their is one key item we want you to remember from this blog it is this ... PROFIT DOES NOT EQUAL CASH ... we repeat profit does not equal cash. Let's repeat that again for funsies, profit does NOT equal cash and louder for those in the back profit does NOT equal cash.

So now we know why, here are our top tips to ensure you have the cash to pay the tax:

  1. Remember that not all the money sitting in your biz bank account is yours to spend. Hive off the tax regularly to a tax bank account so you don't accidentally spend it (this includes for every tax that you may be liable for, ie, GST, PAYGW, PAYGI etc. Here is a blog to demystify and give you the tax breakdown . PS. We can help you with this bit by doing some tax cashflow planning for you

  2. Collect monies owed to you per your payment terms, ie, don't be your customers bank. How do you do that? Automate payment reminders, put a process in place and follow through, make paying as simple as possible with multiple payment methods and online payment platforms.

  3. Don't sit on stock, make sure to turn it over regularly and keep stock levels at reasonable levels

  4. Ensure your debt is classified correctly, so what does that mean? If you have debt that is really long term but you are paying short term interest rates (that are higher), ie, having long term debt in bank overdrafts or credit cards. If this is the case you should contact your banker or broker to try to get it reclassified and consolidate debt where you can.

  5. Only purchase plant & equipment that is essential and make sure it is being fully utilised and productive.

  6. Be conscious of the amounts you are drawing out of the biz (this includes private use on business assets and expenses) and don't overdraw just cos the cash is sitting in the bank. Run the numbers first about who you owe and what might be coming up. (We have written a blog about how to remunerate yourself in a company structure if you need more info on this one.

We hope this has helped to answer this burning question and we want you to know that if you have a tax bill it usually means you have made profit in your biz which is a good thing (that's why we are in biz right?) and we all have to pay our fair share of tax (whether we like it or not) and we are here to help because we have your numbers AND your back!

Still have questions? That's OK, feel free to make contact with one of our amazing team today

Disclaimer: The information provided is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice

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