We often come across circumstances where we see a business that is profitable but are having cashflow difficulties. Often the answer lies on the balance sheet.
Here is a quick example. Let’s say the company’s profit and loss looks like this:
| Sales |
500,000 |
| Operating expenses |
400,000 |
| Profit before tax |
100,000 |
This looks like a fairly good business, but consider the following:
| Company Tax at 30% |
30,000 |
| Car loan repayments, say $1,250 per month |
15,000 |
| Business loan repayments (principal), say $3,000 per month |
36,000 |
| Old ATO debt, say $1,500 per month |
20,000 |
|
101,000 |
The result? A negative cash balance of $1,000.
It is good business practice to prepare a cash-flow forecast each year and continually monitor and manage your cash flow throughout the year.
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by Scott Sharp
Scott is a Senior Accountant at Insight Accounting advice. He has a Bachelor of Commerce and is a registered tax agent. Scott’s experience covers all facets of accounting but he specialises in small businesses and SMSFs.
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