Making sales and a profit: where did the cash go?

1. Profit and cash answer different questions

Profit compares recognised revenue with expenses. Cash flow tracks actual receipts and payments. A bank balance cannot stand in for profit.

Accrual accounting can recognise transactions at a different time from payment. Cash-flow reporting distinguishes operating, investing and financing activities. TAS 7, paragraphs 10 and 18–20. These concepts support cash management; statutory reporting requirements depend on the framework applying to the business.

2. A sale can precede collection

Trade receivables are amounts customers still owe. A recognised sale may not yet have reached the bank. Slower collection can increase funding needs. SET: collection-period definitions

Suggested review: separate invoices not yet due, overdue balances and paperwork delays. Match delivery evidence with expected payment dates and assign follow-up responsibility.

3. Cash may be tied up in unsold stock

Inventory includes goods for sale and, where relevant, materials and work in progress. Buying it uses cash, but unsold stock generally remains an asset until recognised as a cost of sale or adjusted in value. TAS 2, paragraphs 6 and 34

Suggested review: compare ageing stock with actual sales and open orders. Before replenishing, check saleability and whether cash covers payments falling due while you wait.

4. Payments are not always immediate expenses

• Equipment qualifying as an asset may be depreciated over its useful life.
• Loan principal repayment reduces cash and debt; distinguish it from interest.
• Owner withdrawals require classification based on their nature and the business’s legal form. They are not automatically operating expenses.

Depreciation allocates an asset’s depreciable amount over its useful life, reducing profit without a new cash purchase in that period. TAS 16, paragraph 50 · TAS 7: investing and financing

5. Build a traceable cash review

Suggested workflow: opening cash plus actual receipts less actual payments should reconcile to closing cash. Investigate missing or duplicate items instead of inserting unexplained balancing figures.

• Match bank statements and verify physical cash.
• Separate internal bank transfers to avoid double counting.
• Compare expected collections with supplier, payroll, tax and loan due dates.
• Keep forecasts separate from completed transactions and reference evidence.
• Resolve unclear items with the accounting team before major spending.

Related: Costs before marketplace pricing and campaigns