Why Accountants May Not Understand Cash

Why Accountants May Not Understand Cash

Harsh, but this can be a reality. Not always of course, but there’s a subtle difference between ‘cash’ and ‘profit’ you’ll need to remind your accountant about.

Accountants focus on figures, and essentially need to take a snap-shot of these at one point in time, whether it’s a look at what profit and losses exist over a period of time or the assets and liabilities at one point in time, it’s a take on things there and then. There has to be assumptions made in order to make sure that you’re looking at things like-for-like.

So as an example, the accounts for business A will be in the same format as business B and so parallels can be made. Even on an international basis there are accounting standards that can help bring similarities between different countries.

This is right and proper, and helps provide formal versions to submit to any authority for say taxation or company purposes. For the business owner though, this needs interpreting into the real world of cash, particulary so for smaller businesses who realise the importance of this actual ‘currency’ as opposed to larger corporations where the world of accounts with set-assumptions tends to be more important with essential figures like turnover, taxes, and expenditure items which can be quoted and referred to.

So as an example, your accountant comes back with a perfect set of accounts showing a nice rosy profit of x amount – you clarify with them how this can be actually used or drawn as some form of profit, and it’s agreed that it can be ‘taken’. You look at your bank balance though and there is not enough actual money there to account for this profit that is stated ‘on paper’ (or computer screen).

This is the point that you need to make with your accountant, who has done their job in preparing accounts but you now need help in applying them in the real-world situation of maybe low funds in your bank account. You need to ask and quiz them to help explain this difference in lay-man terms, and why there is a such a difference – there will be answers, they just need explaining so that you understand and plan accordingly.

You then need help to de-jargon any phrases they quote – things like debtors, creditors, prepayments, accruals. In short, these are perfectly-OK assumptions that will have been made in the accounts, but they need interpreting. There can be issues such as:

• You have customers and clients owing you money, some things maybe being ‘written off’ as bad debt – so maybe if these simply need chasing and recovering your cash will be in line with your profit.

• You owe suppliers or have just paid a large supplier invoice in an advance payment, a classic example in the UK being a business property rent which is typically for 3 months in advance – this can easily clear out any cash in the bank even though only a part of it may be accounted for in your accounts.

So go on, ask – after all you’re paying for this advice.

Andy Nuttall is from The Website Designer and the BEST range helping source local businesses, with more resources on local accountants at BEST Accountants.