Are your accounts showing a profit, but your bank account has no money?  Or do you have cash in the bank but your accounts are showing a big loss?

It is important to understand the difference between cash and profit. Cash surplus or deficit is the difference between your opening and closing bank balance.  Profit is income earned less expenses.

There are lots of transactions that have differing effects on cash and profit:

Debtors – you have sent out an invoice and recorded the income but have not yet received the cash

Creditors – you have entered the invoice and recorded the expense but the payment is not yet due

GST – You have received the GST from the customer, but have not yet paid it to the IRD

Non cash transactions – for example depreciation is an expense in your accounts, but is not a cash transaction

Capital expenditure – buying assets will reduce your cash balance but not your profit until it is depreciated.

Drawings – this removes cash from the business but does not affect profit.

Good accounting software will be able to show you both a profit and loss and a cashflow for the month. Understanding both will held you to improve your business.

You should also look at your balance sheet.  Add up what you still expect to receive (eg debtors), and take away money that you still need to pay (eg creditors, GST, loan payments, PAYE).  This will give you a good idea of what will be going through your bank account next month.

If you are not already using an accounting software program, consider using cloud software such as Xero or MYOB.  If you look at the numbers on your reports and they look like a foreign language, talk to your business advisor who can demystify the results and help you plan for the future.