Cash is not profit and vice versa
13 September 2022
The purpose of a business is to make money, and that means you have to know the difference between profit and cash flow.
Net profit is what you have left after you deduct all your business expenses from all your revenue. You change net profit only by changing the things that affect revenue and expenses, for example, if:
- You renegotiate with your suppliers, you may get stock cheaper, or carry less inventory.
- Your staff engage with customers better, you can learn more about what they do and don’t like – and get more business.
- You can roster staff differently, you may be able to run your business more efficiently.
Cash flow comes from various sources. However, it also covers operating expenses, taxes, equipment purchases, repayments, distribution, and so on.
Note that a profitable business does not always have good cash flow, and a business with good cash flow is not always profitable. An example of this being that you can have good cash flow, and loss-making expenses.
To work out how fast you can grow your business, you need to look at your projected cash flow. We can advise you on this.
Keeping cash crowned as king
Your business can’t survive without cash.
The following six takeaways are essential for business success:
- Protect your cash position by knowing what it is. Build a cash flow statement and always keep it up to date. If you foresee a shortfall, start at once to fix it.
- Create a cash buffer as an insurance against unexpected difficulties.
- Protect your cash position against revenue shocks by maintaining a balance equivalent to at least two months of operating expenses.
- Be realistic with revenue expectations. Take action now if it looks like sales are not going to get you to breakeven.
- Credit checking up front will reduce the risk of customer non-payment. Make sure you follow up with clear payment terms agreed in writing. Communicate regularly with customers, and automate where possible.
- Every dollar you spend reduces cash reserves. The best way to protect your cash is to create a budget for the spend you know you need, and stick to it.
Looking to improve cash flow?
Make a time to talk to us. We're here to help.
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As an employer, there are several obligations and expectations set by the Inland Revenue Department (IRD) that you must adhere to. Understanding these requirements is essential for maintaining compliance and avoiding any potential penalties. Let's take a closer look at what the IRD expects from you as an employer. Register as an Employer Before you hire your first employee, you are required to register as an employer with the IRD. This is a crucial first step in ensuring that you can meet all tax and payroll obligations. Accurate Record Keeping The IRD requires you to keep accurate and detailed records of all employment-related transactions. This includes: Employee personal details Wages and salary paid Payroll dates and methods PAYE deductions and remittances Details of benefits or allowances provided to employees Maintaining proper records helps ensure that you are reporting and remitting the correct amounts to the IRD. Deduct PAYE Tax You are responsible for deducting PAYE (Pay As You Earn) tax from your employees' pay. This involves calculating the correct amount of PAYE and ensuring it is deducted from each employee's salary or wages before their net pay is provided. Pay Employer Contributions In addition to PAYE, you may also be responsible for contributing to your employees' social security and retirement benefits, depending on the country you operate in. These contributions are typically paid in conjunction with PAYE tax. Issue Statements and Forms At the end of the tax year or upon employment termination, you should provide each employee with a statement showing their total earnings and PAYE deductions. Additionally, filing the appropriate end-of-year PAYE schedules with the IRD is required. File Employer Returns Employers are required to file regular returns with the IRD, which could be monthly, quarterly, or annually, depending on specific regulations. These returns should accurately report all payroll activities, including PAYE deductions. Handle Tax Codes and Changes It's crucial to apply the correct tax codes for each employee's circumstances. Any changes in employment status or tax code must be updated promptly to ensure accurate tax withholdings. Comply with Audit Requests The IRD may audit your business to ensure compliance with employer obligations. As such, being prepared to provide all requested information and records in a timely manner is vital. Adhering to these expectations from the IRD is not just about compliance; it's about fostering a transparent and trustworthy relationship with your employees and the tax authorities. If you need assistance with understanding or managing your obligations as an employer, consider reaching out to a professional accountant. Our team is here to help you navigate these responsibilities seamlessly, ensuring peace of mind and allowing you to focus on growing your business. Feel free to contact us for further information or assistance.
Thinking of starting your own sole trader business? The Sole Trader Toolkit from the Ministry of Business, Innovation and Employment has all the basic advice you might need.
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