“I’m Working Hard — So Where’s My Cash?” Check Your Balance Sheet!.

Here’s a question that comes up often: “If I’m making money… where has my cash gone?”

If sales are booming, you’re rushed off your feet, and everything is — on the face of it — rosy, why hasn’t your bank balance grown?

It can be worrying, even demoralising, to be working hard and feel like you’ve nothing to show for it. But a lack of cash at hand could point to a range of wider issues, like spiralling costs, bad debtors, poor planning, or cash flow pressure.

So, to answer your question, you need to get to grips with one of the most important (yet, for many, the least understood) statements in your accounts: your Balance Sheet.

What is a Balance Sheet?

Your company’s Balance Sheet (a.k.a., statement of financial position) outlines your assets and liabilities, along with your equity in the company. Taken together with your cash flow statement and income statement, the balance sheet helps to convey the financial performance of your company.

In short, the Balance Sheet is based on the following equation: Assets = Liabilities + Equity.

The statement is split into two sections (Assets on one side and Liabilities + Equity on the other) and these sections must balance, hence the name.

Being able to analyse your balance sheet means you can scrutinize performance metrics such as liquidity, risk, and efficiency. And if you want to understand where your cash is being spent in your business, you need to understand the figures in your Balance Sheet and how they relate to your other statements.

Remember: It’s always a good idea to speak to a professional accountant when reviewing your financial statements to make sure everything is accurate and up-to-date.

Show me the money!

If you want to track how cash is moving through your business, you can start by looking at the Statement of Cash Flows report in Xero. This will give you a clear overview of cash movement for a particular period, and it also displays a cash increase/decrease for the period in question.

Using this info alongside an analysis of Balance Sheet items, you’ll soon see where your cash is going.

Some common destinations include:

  • Capital Spend: When you purchase assets, whether it’s new laptops or a deposit on a new vehicle, the cash spent will be allocated to fixed assets on a Balance Sheet. This means profits may look good, but cash at hand has decreased.
  • Debtors: Paying attention to debtors is crucial, as this is often where most of the cash is tied up for a business. It’s a good idea to look at this in terms of debtor days (i.e., how long, on average, it takes a customer to pay you). You can then work out how your cash flow would improve if you were to bring this down by even just 5 days.
  • Inventory: If your business holds stock, this can often cause cash flow problems. The value of your inventory will be reflected in your balance sheet, and you can think of any unsold stock as essentially cash sitting on your shelves. It’s, therefore, a good idea not to over-order and instead keep stock levels to a minimum to avoid too much cash being tied up in inventory.
  • Owner’s Drawing: You need to keep track of how much money you’re drawing from your business. This can often add up to more than you think. A little extra here and there can be a major contributing factor towards less cash in your business, so plan carefully!
  • Tax Liabilities: The nature of VAT and corporation tax deadlines can actually contribute to a business’s cash flow looking healthier than it actually is. You don’t owe anything for a few months and then, bang, a hefty tax bill.And if you don’t account for these upcoming payments, setting aside what you owe, you could be left scrambling at the end of each quarter, wondering where all “your” money has gone.

To guard against this, some companies elect to pay corporation tax on account with monthly payments. This means final payments are smaller, and it helps to manage cash flow throughout the year.

The bottom line

Understanding where your cash has gone (or is about to go) is vital to the success of your business. But you can’t always be expected to forensically examine your accounts and run your business.

That’s why we recommend that you work closely with a professional accountant to analyse your financial statements, pinpoint cash flow issues, and plan for the future. Only then will you see more cash in the bank!

Need some help getting to grips with your Balance Sheet? Let’s talk. Book your 15-minute discovery session with Spark today. 

“We wouldn’t be in the strong position we find ourselves in today if we didn’t have Spark. Spark give us the clarity and confidence we need to grow our business. We don’t make a single significant decision without them.” — Chris Garrat, Bert

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