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Thread: Not a financial mind...

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    Not a financial mind...



    Okay....so I joined the company business about two years ago. My financial knowledge is very limited but I need to understand something, which I don't seem to grasp....

    We run a fitment centre. Dad is in charge of the finances, which makes perfect sense, given his history and track record. My older brother manages the shop and I do marketing and am the meet & greet guy...

    According to our profit and loss statement we made around R500k net profit last year, which we now need to pay income tax on. The smart move would be to upgrade some equipment....however....we don't know where this money is, when asked, dad's reply is good question. This EXCLUDES three bonusses each during the year, which was declared, but we never received in order to better cashflow.

    My opinion?
    1. The profit and loss statement shows total sales and not what portion was made on account to debtors.
    2. The profit and loss statement does not reflect any payment received from debtors....

    Our debtors book is currently standing on about R750k....R350k of which is in 90 days and over. Would you agree with me this is where I profit is tied up? Is there any way to better control/ measure our profitability?

    We have (finally, at my insistance, paid a retainer to Accountability) to start getting in the debtors that are
    so far in arrears...

    Just for clarity, I don't for one moment doubt my dad's integrity, just think he might be a little too 'old school'...

    Opinions please Gents?

    HB

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    Diamond Member adrianh's Avatar
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    Who drew the profit & loss statement up?
    How easily someone is offended is directly proportional to how stupid they are.
    ~GS Elevator

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    It's an automatic report run on Omni...

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    Diamond Member Justloadit's Avatar
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    What about Stock, have you accounted for this in your cash flow? Stock must be paid from some where.
    From your statement, it sounds as if there is no money in your bank account either.
    Outstanding money as far as I am concerned, is not PROFIT, it only becomes profit when the money is in the bank account, else it is a LOSS!

    IMHO - I reckon you are too laxed on overdue accounts. Any account that exceeds 60 days becomes more and more difficult to collect, and every month that goes by means you have to finance this debt, as you have done by not taking out the bonuses in real cash. Doing a book entry is totally useless in my book. If my business can not pay me my salary every month, then I am doing something wrong, either in my collection or not invoicing.

    I can not see why you must give credit to individuals, and if you are giving credit to other business, you must keep a tight reign, and collect your money fast, 30 days is a luxuary in the business you are in. Your creditor has probably already collected his money and spent it somewhere else, and now you are short changed. Time to start changing the way you are doing business.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    Stock is bought from creditors and brought into account at the cost of sales...but I see your point.... Sales does not mean money in the bank and stock was bought but not necessarily sold in order to pay. There are no noteworthy stock losses to speak of.

    I agree we used to be lax on overdue accounts. We have started taking action now though. Account are mainly for our dealers or fleets that make huge purchases (excess of R40 000 per month) Some individuals are given credit, but these are special circumstances... I hear what you are saying that profit is only profit once it is in the bank....is this a shortfall of this specific accounting software?

    The profit and loss statement is very basic in Omni...Total turnover minus Cost of sales, plus other income (not including payments from debtors) minus expenses. Thus our Net profit is only a theoretical amount...

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    Outstanding money as far as I am concerned, is not PROFIT, it only becomes profit when the money is in the bank account, else it is a LOSS!
    The moment you create an invoice, income is recognized. The fact that it has not been collected yet, does not change the fact that it qualifies as income.

    Have you considered making a provision for the inevitable - bad debts? Or even writing off bad debts after all reasonable steps have been taken to collect the money? This will bring down your profit, and it will make more sense.

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    Diamond Member Justloadit's Avatar
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    Just remember that a bad debt entry includes VAT if you are VAT registered, and not only that, if I remember correctly, have not done my own VAT forms for some years now, there is a special entry on the VAT from in which Bad debts are written into as a separate amount from all other VAT figures. In the case a bad debt is recovered, the amount must also include VAT, and is entered again in a special entry on the VAT form.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
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    Diamond Member Justloadit's Avatar
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    Quote Originally Posted by Hannes Botha View Post
    The profit and loss statement is very basic in Omni...Total turnover minus Cost of sales, plus other income (not including payments from debtors) minus expenses. Thus our Net profit is only a theoretical amount...
    It all depends on the 'quality of the data' entries into your accounting package, and if they have been allocated correctly.
    As with any computer system, garbage in - garbage out.
    You need to study the entries in your accounting package, and verify that the data capturing is being allocated to the correct places in order to pull a trial balance, and then a balance sheet.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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    I agree Justloadit.

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    Site Caretaker Dave A's Avatar
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    The trouble with any income statement is it tells you absolutely nothing about your cash flow.

    I'm not familiar with Omni, but what you need is a cash flow statement. If the software doesn't produce one by default, you can extract one from movements in the balance sheet.

    Ultimately, a cash flow statement will tell you exactly why your profits aren't turning into cash. e.g. -
    If your debtors has grown R100k over the period, that's R100k in profits that hasn't produced cash. (Normally you'd try to offset this with some growth in creditors).
    If your stock holding has increased over the period, this is also an area that is soaking up profits.
    Then there's capital movements such as vehicle instalments...

    There's an old saying -
    Turnover is vanity.
    Profit is sanity.
    Cash flow is reality.

    One tends to lead to the other, but the real bottom line is cash flow.
    No-one's going to sue you for under performing in the first two, but if you can't pay your bills...
    Cash flow is what makes or breaks you.
    The trouble with opportunity is it normally comes dressed up as work.

  11. Thank given for this post:

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