Show me the money !

A common question I get asked all the time is - if I have made a profit - Where is all that magical money and why don’t I have it ?

To answer this question we need to explain how to understand 2 reports that are VITAL to your business

First thing to understand however is that - EVERYTHING - that is entered into your accounting software goes to an account in the Chart of Accounts - either an account that lies in the Profit and Loss report or an account that lies in the Balance Sheet report.

Righto -

1. Profit and Loss

This report shows your sales/turnover/revenue/income at the top and then subtracts your expenses/costs/cost of sales.

The end result is a profit or a loss.

FYI a loss is often shown in brackets.

We can see in this report what you have earnt and what you have spent.

Its a great report to look at month by month to see trends and growth or decline.

A key thing to look at in this report is your Gross Profit - don’t just scroll to the bottom and look at the end result - spend some time analysing the top end!

To be able to see a Gross Profit you need to see your total sales then your direct costs - so think of it this way - to make those sales, your direct costs are the materials etc that you HAVE to BUY to ensure you can invoice those sales

For example - if you are a builder - it would be your materials - if you are a cafe it would be your food costs.

Everything else is an expense e.g. telephone, rent, etc.

When in doubt - ask your accountant !

So many businesses do not show a Gross Profit in their Profit and Loss report - they list everything as income then expenses.

Renovating your Chart of Accounts in your software will lead to being able to see this gross Profit in your Profit and Loss Report - we strongly recommend you seek advice from a professional before you change your Chart of Accounts - remember it is the back bone of the accounting system !

Indeed once you have this Gross Profit figure - you can compare to month on month, year on year and even in your industry! The ATO create benchmarks - a fancy way of saying that they have record of Gross Profit figures for many industries.

The ATO use the information in Tax Return data to create the Benchmarks - they can be found at https://www.ato.gov.au/business/small-business-benchmarks/

So now that you know what your profit is - the next biggest question is - WHERE is it ??

To delve into this - we need to understand the other VITAL report in your business

1. The Balance Sheet

If the Profit and Loss shows income minus expenses - the Balance Sheet shows the worth of the business - i.e. movements in where the profit is .

This is where most businesses do not look at their Balance Sheet - indeed in times gone past Balance Sheets in software do not match what is lodged in your Tax Return - but more on that later…

First let’s understand this report .

It shows Assets less Liabilities equalling Equity - so what does this mean ?

Assets - Items of worth e.g. money in Bank accounts, vehicles, equipment, property…

Liabilities - things you owe - loans, ATO debts, overdrafts, credit cards, repayments

Equity - if you paid off the assets - this shows how much your business is worth - it also brings in the Profit from the Profit and Loss as an item called Retained Earnings.

So although the Profit and Loss shows you your position - I think the Balance Sheet tells you so much more about the state of your business.

Now - I know some of you will crack open this report and the numbers will be confusing and seem not quite right ? There is a really good reason for that .

Each year when you complete your Tax Return - you are effectively declaring the Profit as Income and the Tax Return is you paying Income Tax on the Profit - but before you even get to that point - there are some adjustments your Tax Agent needs to make.

I am not a Tax Agent - I am a BAS Agent - so here is Brendan Cole of HJC Accountants, a Geelong based Tax Agent AND Accountant to explain what happens here - in a simple way without all the intricate steps so you get the idea….

“To produce a Tax Return there are a number of checks and balances we need to undertake.

Firstly we need to check the data and make sure that what has been entered into the software is balanced to the bank and represents the figures we see.

We may need to reclassify some items

We then apply depreciation to assets - simply put we put in a further expense to show the decline in value for the year of the assets.

We also review and decide how to distribute the profit especially if there is more than 1 Director or the business is a Trust.

We look at tax minimisation, tax planning for future years and cash flow of the business. We also apply the latest rules and Tax breaks the government may have on offer to ensure the business has the optimal result.

Often these changes require Journals to be posted into the software to align the figures to the Tax Return.

In years gone past, clients would use desk top software and provide us with a copy of the file to work on the Tax Return whilst they keep using the software in their day to day business.

Now a days - a lot of clients are using Online Cloud based software - the data is LIVE and we are looking at the same accounts. So we can load in or adjustment journals to bring the figures to account.

We love working with clients whose numbers are clean as it helps us get on with the job quicker and in turn add more value to the client.”

Brendan Cole

HJC Accountants

http://www.hjc.net.au/

So back to the initial question ……where is the profit ?

To find the profit we need to look in the Balance Sheet

There are a number of places to look :

1. Bank accounts - have the bank balance increased since last year - if so there is your profit - it is sitting in the bank - alternatively if you have an overdraft - has money being deposited into bank to reduce the overdraft from the same time last year - again this is where money has gone.
2. Liabilities - did you pay off debt ? Have your car loans decreased ? Have you paid off credit card debt
3. Did you pay off personal debt? Pay mortage payments? Draw money for living expenses ?

The analysis of the Balance Sheet can be a challenging exercise - what we aim to do here at KRS Consulting Group is to work with you as a client to maintain a healthy file of data that is correctly allocated and balanced to provide to the Tax Agent/Accountant for year end so they can get the best information to do their Year end. In turn they are the professionals you should turn to to understand your profit and where it is.

The next conversation is planning around - tax on the profit and increasing profits to meet your goals. Not to forget planning for the INCOME tax you will owe on the profit. Talk to your accountant - they are a great resource

Our aim as Bookkeepers and BAS Agents is to make best use of their time and skills to ensure what information you have is accurate and reliable so they can get on with their task of assisting your business to succeed.