Your accounts show a profit of S$120,000 for the year. You open your bank app and see a balance up by only S$6,225. You feel confused, and you are not alone.
Profit and cash measure two different things. Profit counts income when you make the sale and costs when you incur them. Cash counts money only when the money moves in or out of your bank account. A company with a healthy profit still runs short of cash, because several uses of money never appear as an expense.
Where the cash goes
Five items cause most of the gap.
- Customers who owe you. You invoice in March and the customer pays in June. The sale counts as profit now and the cash arrives later.
- Stock and materials. You pay the supplier today. The cost reaches your profit and loss only when you sell the goods.
- Loan repayments. The interest is an expense. The principal you repay is not an expense, yet the cash still leaves your account.
- Tax. You pay income tax to IRAS after the year ends, so the bill lands as one lump sum.
- Money you take out. Dividends and director’s drawings lower your bank balance and leave your profit untouched.
A worked example
Take a trading company with a profit of S$120,000 before tax. Corporate income tax is charged at 17%. Partial tax exemption lowers the amount taxed, so start there.
- Exempt on the first S$10,000: 75% x S$10,000 = S$7,500
- Exempt on the next S$110,000: 50% x S$110,000 = S$55,000
- Total exempt: S$7,500 + S$55,000 = S$62,500
- Taxable income: S$120,000 – S$62,500 = S$57,500
- Tax: S$57,500 x 17% = S$9,775
Now follow the cash through the year.
- Profit before tax: S$120,000
- Less the rise in amounts customers owe you: S$45,000, leaving S$75,000
- Less extra stock bought: S$20,000, leaving S$55,000
- Less loan principal repaid: S$24,000, leaving S$31,000
- Less tax paid: S$9,775, leaving S$21,225
- Less dividends paid: S$15,000, leaving S$6,225
The company earned S$120,000 and kept S$6,225. Nothing went missing. The money sits in debtors, stock, the bank loan, the tax bill and your own pocket. This example is simplified and ignores depreciation, GST and rebates, which change the figures in a real set of accounts.
What to do next
Start with a cash forecast for the next 13 weeks. List the money you expect in and the money you owe out, week by week. Chase overdue invoices every week. Set tax aside each month in a separate account. Check your stock levels against what you sell. Look at your cash before you declare a dividend, not after.
Our Profit-to-Cash Review follows your own profit through to your own bank balance and shows you where each dollar went. You find the page here: Profit-to-Cash Review page
This article gives general guidance and does not replace advice on your own situation. We quote our services by scope after we see your accounts.
Send a WhatsApp message to +65 9876 3553 or email henry@cschow.com.sg. Tell us your profit and your bank balance, and we will talk through your numbers.
Henry Chow
Public Accountant
C S Chow & Co