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Where Has My Cash Gone?

14 September 2022
Mark Friend
Accounting & Compliance, Raising Finance, Building a Business

You meet with your accountant and they tell you that you’ve made a profit of £150,000. You look confused and think “I don’t understand this. How am I doing so well yet there is no money in the bank account? Where has my cash gone?”

Simply put, a business can have a profit but not have cash in the bank as profit is calculated based on what you invoice and what you purchase rather than cash received and cash spent. Monies for an invoice might not have received and similarly payment for a purchase may have been made on credit and no money spent. In addition some purchases are not necessarily trading expenditure but assets bought for the business and capitalised on the balance sheet.

To illustrate; ABC Limited has a 31 March year end and issues invoices to its customers with 30 day credit terms. Say ABC Limited sends £10,000 of invoices to its customers on 29 March, these would be reported in the profit of the company even if they were then paid in April. Similarly if ABC Limited had invoices from suppliers of £3,000 on 29 March which they paid on 60 day credit terms they would include this cost as an expense. In this simple example they would report a £7,000 profit in the accounts but will not have received any cash from its customers or paid any monies to suppliers. The cash movement is £Nil but there is a profit of £7,000.

The same could be said when a business invests money into plant and machinery or office equipment. The value of these purchases do not decrease the profit in full, but instead their cost is spread across their useful economic life in what accountants call “depreciation”.

The best report to run to see where the cash has gone in a business is a cash flow report, which summarises what money, has been spent and received where. This report, together with a Profit and Loss and Balance Sheet report, can help you see exactly where your business is – so you are not just reliant on your bank balance! These reports form the basis of what accountants call “management accounts”.

As a simple example of a business’ cash movement in a period, let’s take the following example and what each line represents:

Money from trading
The net profit before depreciation £150,000 This is the profit from the annual accounts, ignoring any depreciation amounts
Money from other sources
Increase in Hire Purchase liability +£20,000 This represents additional hire purchase finance that has occurred during the year to buy new vehicles or assets
Sales of assets +£2,000 Sale proceeds from selling assets within the business
Increase in what we owe our suppliers and others +£1,000 Where credit terms are arranged with suppliers and the amount owed from last year has increased
Capital Introduced +£20,000 This is a capital injection by the business owner to increase working capital
Total extra money for the year +£193,000
How we have spent this money?
Our private or personal expenses -£15,000 Personal drawings from the business
Our income tax bill -£30,000 Tax payment paid out of the business for the owner’s personal liability or the company’s Corporation Tax liability
Purchase of assets -£30,000 New assets (equipment or motor vehicles) purchased by the business
Increase in the amount our customers and others owe us -£3,000 Where credit terms are arranged with customers and the amount owed from last year has increased
Decrease in loans -£15,000 Repayments made in the year to clear bank or personal loans
Total money spent in the year -£93,000
This leaves us with – Increase in cash +£100,000
How does that compare to the cash movement?
At the beginning of the year £15,000
At the end of the year £115,000
Increase/Decrease in cash +£100,000


So do you know where the cash has gone in your business or are you just reliant on your bank balance, and the year end accounts are just a mystery? Accurate management accounts as well as detailed analysis, such as the above, can assist business owners gain a better understanding of their financial situation, allowing for more informed decisions.

Having good management accounts and an understanding of cashflow is so important particularly during periods of recession or high inflation. If you want a better understanding of how your business operates please contact your line manager or Mark and Andrew for more details. The information in this blog is correct as at 14th September 2022.

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