Profit but no cash: where is the money waiting?

Nermin the hairdresser's month

Nermin Hanım runs a hair salon. At the end of the month she looked at her accounts: this month she did 40,000 lira of work, and this month's expenses came to 28,000 lira. Profit appears to be 12,000 lira. But there are 3,000 lira in the bank. Nermin Hanım was surprised: "We said there was a profit, so where are the 12,000 lira?"

The answer is this: Profit is a calculation in the books; cash is the money in your pocket. The two do not have to show the same figure at the same time. The difference comes from money waiting in other places.

Four places where money waits

1. What the customer owes (credit sales receivable, veresiye alacak)

Of this month's 40,000 lira of work, Nermin Hanım did 10,000 lira for a wedding party who said "We'll pay at the end of the month." The work was done, it was recorded as income, and it went into profit. But the money has not arrived yet. This money is not with you; it is waiting with the customer. This is called a receivable (alacak). We explain receivables separately in the lesson Credit sales and current accounts (in Turkish).

2. Goods sitting on the shelf (stock)

Nermin Hanım spotted a discount and bought 6,000 lira of hair dye. She used only 2,000 lira of it this month. The remaining 4,000 lira of dye is on the shelf. The money left the cash box but has not yet turned into an expense, because the dye has not been sold or used. This money is waiting inside the dye on the shelf. The next lesson is devoted to this topic: Stock: money waiting on the shelf (in Turkish).

3. Expenses paid in advance

If you paid three months' rent in advance, or paid a year's insurance in one go, the money left this month, but in the profit calculation only part of that money is recorded against this month. The money that left the cash box is larger than the amount deducted from profit. This is a distinction you make in your own accounts so that you can see the real profit of the business; how it is recorded in the official books depends on the type of books, and your mali müşavir (certified public accountant) knows that.

4. The state's share

If you are a VAT payer, the VAT (KDV, value added tax) included in a sales invoice is not yours; it is the state's money. Tax is also paid on your profit. The SGK premium (SGK primi; SGK is the Social Security Institution) will also be paid every month. This money sits in your account for a while, but it is not yours; when the payment day comes, it leaves the cash box. So part of the money you see in the bank may in fact be waiting for tax day as well. We turn this into a habit in the lesson Setting money aside for tax (in Turkish).

Nermin Hanım's accounts

This table is an example; every business will have its own figures. But the logic is always the same: the difference between profit and cash is the sum of the places where the money is waiting.

What should you do?

Don't see the difference between profit and cash as something to be afraid of. Just ask two separate questions:

1. Did I earn money this month? (profit)
2. Did money come in this month, and will it be enough for my payments at the end of the month? (cash)

An employer who knows both separately will not get any surprises. Even in a month that shows a profit, it is possible to run out of money on rent day; likewise, in a month that shows a loss, there can be money in the cash box. For more, see the longer article on the blog: I'm making a profit but I have no money: why? (in Turkish)

A short checklist

• How much money is waiting with customers? How many days old is the oldest receivable?
• How much stock is waiting on the shelf or in the storeroom?
• Did I pay any expenses in advance this month that belong to the coming months?
• How much money needs to be set aside for the state, and has it been set aside?

Someone who knows the answers to these four questions, instead of saying "there's profit but no money", can say where their money is.

The same story in another shop

This doesn't only happen at a hairdresser's. Ayşe Hanım, who runs a corner shop (bakkal), buys 5,000 lira of goods from a wholesaler and fills her shelves; this money does not yet appear in the profit calculation, but the cash box has emptied. Hasan Usta the mechanic does a job for a fleet owner who says "I'll pay next month"; the books look great, but the drawer stays empty. A haulier buys fuel up front but collects the freight charge 30 days later. In each case the question is the same: where is the money right now?

When should you worry?

If the difference between profit and cash is small, there is no problem. These are the warning signs:

• if you are delaying rent or supplier payments even in months that show a profit,
• if the money waiting with customers grows a little more every month,
• if the stock waiting on the shelf is growing faster than sales.

If you see one of these signs, it is time to review your prices, your payment terms or the quantities you buy. Talking to your accountant about "why is there profit but no money?" is the cheapest way to solve this problem.

In one sentence

Profit tells you whether the business is healthy; cash tells you whether you can make it to the end of the month. You need to look at both, separately.