Why your business isn’t as profitable as you think it should be

We often see businesses who are experiencing growth, but the cash flow is still tight, and the business owner can’t understand why – according to the profit and loss account (P&L) the business is profitable, so why is cash flow not mirroring the success of the business?

In this type of scenario, the business owner will usually be very focused on the P&L, and possibly also the budget. It’s quite common for this type of business to have a bookkeeper or finance manager in place who has been with the business since the beginning, and has grown with them. But it’s now reached the point where this person just doesn’t have the expertise required to spot issues and problems in the finance department and the business.

Grown beyond their capabilities

At this stage, the finance function is in danger of becoming out of control, and as a result, the Balance Sheet may become a place for issues to hide. This can happen accidentally, but it can also be deliberate, either through fraudulent intention, or more likely, as a result of a bookkeeper/finance manager who is out of their depth reacting to pressure from their MD questioning why the numbers aren’t right. An inexperienced finance manager may enter things into the Balance Sheet so that the P&L ‘looks ok’ to keep the MD happy, and without careful management this can lead to issues further down the line.

What’s the difference between the P&L and the Balance Sheet?

At this point it might be worth explaining the key difference between a P&L and a Balance Sheet.

The Profit and Loss account is a report showing the performance of your business for a specific period. It summarises your income, less all of your costs leaving your profit for that period. It’s usually monitored regularly by the business. The Balance Sheet is a statement of your company’s assets and liabilities at a given date and this net amount gives an indication of the overall financial health of the business (for example a negative net figure would indicate the company was loss making at some point). Issues and discrepancies can become hidden in here, and because this report isn’t about the day-to-day running of the business it often gets overlooked until it’s too late.

How to spot the issues

So what can a busy business owner do about this, without becoming an accounting expert yourself? As the MD or CEO of the business, your focus is naturally on growing and developing the business.Finance and accounting are unlikely to be in your core skill set and that makes it hard to spot errors or even know what to question.

“I don’t know what I don’t know.”

We’ve put together an easy-to-follow guide outlining six questions for business owners to ask their finance manager which will help them to quickly find out where any issues might be hiding. Our guide will tell you which six standard accounting reports to request, and the telltale signs to look for in each of them. We also outline suggestions for next steps to take should you uncover any potential issues – although our best advice would be to take professional advice from a qualified accountant and get a Finance Director onboard asap.

Download our free guide here to quickly find out why your business isn’t as profitable as it should be – and how to resolve it.