Hopefully THIS message will be more legible than the previous couple. All sorts of electronic gremlins at play apparently, and not one of which I understood.
I shouldn’t be surprised – I was subjected to cruel and sustained mockery by a daughter this week for not possessing a full and complete understanding of how Instagram worked (or possibly Snapchat – I forget). Ironically, if I did understand her world and got involved she’d be mortified.
Teenagers know everything, are visionary and utterly original thinkers, and are the anointed keepers of the very secrets of life itself – we all know that and are, I’m sure, very grateful.
But once the years of teenage certainty and entitlement are gone, we realise that we don’t know everything and nor does anyone else. And things we might take for granted as self-evident are not so for other people.
Here’s an example from my world.
If you have the sort of accountant who meets you once a year, 8 months after the year-end you may be familiar with this highly abridged version of a conversation:
Accountant: “You’ve had a good year. You’ve made £100,000 profit.”
Client: “But I have 38p in my bank account. I sense a disconnect here.”
Accountant: “Oh. Anyway – your tax bill is £20,000 and is due next Tuesday. Tax is an indicator of success. Embrace the pain.”
Client: “But I have 38p. Am I missing something? Where has the £99,999.62 gone?”
Accountant (thinks): Oh for god’s sake. It’s obvious.
Putting aside the appalling client service aspect, the issue here is one of the “expert” assuming the client knows what the expert knows. But that is rarely the case. Accountants know why profit doesn’t equate to cash – business owners often don’t.
I’m not being patronising – this is an issue that raises its head time and time again so you’d think accountants would make the effort to explain it in non-accountant terms. But they don’t, because that would break down the barriers. We wouldn’t be experts anymore and we can’t have that.
I can’t be bothered with all that stuff, so here’s the answer. It’s a combination of strange accounting and tax rules and logic. And it will apply in about 95% of cases:
|Sales invoices sent||£1,000,000||Paid and unpaid|
|Expense invoices received||£(900,000)||Paid and unpaid|
|Profit||£100,000||What you see in the profit and loss account|
|You spent the money, but weird accounting and tax rules apply|
|Machinery bought||£(20,000)||Doesn’t go in the profit and loss account so isn’t included above|
|Owner’s money not paid through payroll||£(50,000)||Doesn’t go in the profit and loss account so isn’t included above|
|Unpaid sales invoices||£(40,000)||If they’re unpaid they’re not in the bank|
|Unpaid expense invoices||£10,000||If they’re unpaid, they haven’t left the bank|
And there you have it. Ok, you might need some deeper explanations for some of this stuff, but the basic structure is fairly standard and hopefully once you get it, you can apply it to your own business and anwer that nagging question once and for all.
Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.