Have you ever wondered what happens after you hand your records over to your accountant? How can it be that so often you get a set of accounts back a month or so later which show a profit figure that appears to have no basis in what you know has been going on within your bank account?

You may have spent the year feeling like you are barely covering your business’s costs, only to find that when you have your annual conversation with your accountant you have in fact made a record profit! Maybe you have found the opposite to be the case, but the fact remains that something happens after you send your records which apparently transforms your business finances.

Now, if you want to get to grips with why this keeps happening, and indeed possibly begin to have a more accurate measure of your profit levels, there is one fundamental concept that you will need to keep in mind:

The payments and receipts within your bank account can actually be a very inaccurate way of measuring your business’s profitability.

This may well seem to be completely against reason but bear with me for a minute.

What we are primarily concerned with when we prepare your accounts is how much you have actually earned within your accounting year, whether or not you have physically received cash for this. For example, if I purchased something from you, and arranged to make payment in 6 months time, you have actually earned that money now even though you will not receive payment for 6 months. Conversely, if you purchase items from your supplier, but don’t make payment for a few months, this will still be a tax-deductible expense in your accounts.

There is also the issue that not all of your expenses will be deducted from your profits. The main offender that we regularly come across is your loan repayments. Naturally, you would expect that any loan repayments you make will end up reducing your profits, and therefore your tax bill. Unfortunately, this is not the case – and you will only get tax relief on the interest payable.

Of course, the above two points are just the tip of the iceberg when considering this issue, but I hope that they show you that assessing your profitability is not as simple as looking through your bank statement.

So then, if the amount of cash you have sitting in the bank isn’t necessarily an accurate measure of your profits, what do you do?

In my mind, the answer is pretty simple – keep in touch with your accountant (and they should be keeping in touch with you!). If you have any concerns about what your accounts will say, then they are the best-placed people to advise you. Maybe you are planning to apply for a mortgage or finance in the coming year, and you know that the lender will require proof of a certain profit level to approve the loan. Maybe you are just concerned about cash flow and want to make sure that you are prepared for what your upcoming tax bill will be. Whatever the reason, your accountants are there to help make sure that these potential hurdles are cleared with ease.

If you’d like us to be your accountants for your dental business call us on 01872 300232 or email us at hello@hivebusiness.co.uk.