What Your Bank Balance Doesn't Tell You
If your bank balance looks healthy, does that mean your business is doing well? Not necessarily. Your bank balance is just a number at a point in time. It does not tell you the full story.
Cash Is Not the Same as Profit
This is probably the biggest source of confusion I see. Cash and profit are related, but they are not the same thing.
You can have a healthy bank balance and still be making a loss. Maybe a big invoice just landed, or a customer paid a deposit for work you have not done yet. That money is sitting in your account, but it is not profit. Some of it might even need to be refunded or spent on materials and labour before the job is finished.
On the flip side, you can be genuinely profitable and still feel cash poor, especially if customers are slow to pay or you have just made a big equipment purchase.
Profit is about whether the business is actually working. Cash is about whether you have money available right now. Both matter, but they answer different questions.
Money That Is Not Really Yours
If you are GST registered, some of the money sitting in your account is not yours to spend. It is GST you have collected from customers on behalf of IRD, and it is due back to them at your next filing.
It is easy to look at a healthy balance and feel comfortable, without realising that a chunk of it is already earmarked for your next GST payment. This is one of the most common reasons business owners get caught short.
What Is Coming, Not Just What Is Here
Your bank balance reflects what is in your account today. It does not show you what is about to leave it.
Rent, wages, supplier invoices, loan repayments, insurance renewals. A balance that looks comfortable today can look very different once next week's bills go out. Without a clear view of what is coming, it is easy to spend money that was already committed elsewhere.
And Then There Is Tax
Provisional tax, terminal tax, PAYE. If you have not been setting money aside for these throughout the year, your bank balance is giving you a falsely comfortable picture. The money looks available, right up until a tax bill arrives and reminds you it was not really spare after all.
So What Should You Be Looking At Instead
A bank balance is a useful number, but it should not be the only one you look at. A clearer picture comes from knowing:
Your actual profit, not just your cash position
How much of your balance is GST you are holding for IRD
What bills and payments are due in the next few weeks
Whether you have set aside enough for upcoming tax payments
This is exactly what good bookkeeping gives you. Not just a return filed on time, but a real understanding of what your numbers mean and what is coming next. If you would like a clearer picture of what your numbers are actually telling you, get in touch and we can have a chat.
Comments