Article 4: Why a Shop Can Make a Profit and Still Have No Cash

The short answer: profit is a number on paper. Cash is money you can touch. In a month, your shop can make a profit, but the money may be with your customers, on your shelves, in your home, or paid to a lender. This article shows the five places to look.

Profit and cash are not the same

Profit tells you if the shop earned more than it cost. Cash tells you how much money you have to pay your bills today. A shop can show a good profit and an empty cash box at the same time. This does not mean you did something wrong. It means the money is somewhere else.

Five places where your profit goes

1. Customers who have not paid. Sales on credit count as sales and as profit. But the money is not in your cash box yet.
2. More goods on your shelves. If you bought more goods than you sold, the money is now sitting on the shelves as goods.
3. Money you took for yourself. It is not a cost of the shop, so it does not reduce your profit. But the cash is gone.
4. Paying back a loan. The loan itself is not a cost, so it does not reduce your profit. But the cash is gone. (The extra charge, the interest, is already in your other money spent.)
5. Big items you bought, like a fridge or a computer. You paid the full price in cash, but it does not reduce one month’s profit by the full price.

One thing helps your cash: goods you bought from a supplier on credit and have not paid yet. Your cash stays with you for now, but you must pay later.

An example (the same month as the profit article)

Your real profit for the month is 25,000. Now see where it went:

• Customers owe you 12,000 more than at the start. (You gave 15,000 on credit, and they paid back 3,000 of old debts.) 25,000 − 12,000 = 13,000
• Your goods on the shelves grew by 5,000, from 30,000 to 35,000. 13,000 − 5,000 = 8,000
• You took 18,000 for yourself. 8,000 − 18,000 = −10,000
• You paid back 2,000 of a loan. −10,000 − 2,000 = −12,000
• You bought a fridge for 4,000. −12,000 − 4,000 = −16,000

Your cash went down by 16,000, in a month when the shop made a profit of 25,000.

What to do

• Collect credit on a fixed day each week. Start with the customers who owe the most. Keep a list of who owes what.
• Count your shelves every month. Buy less of the goods that sell slowly. We explain this in the next article.
• Decide a fixed amount to take for yourself each month. Do not take more than your profit.
• Plan your loan payments like rent: put a little aside every day.
• Try to keep enough cash to pay at least one week of your other money spent.
• Use the Excel sheet once a month to check where your cash went.

Common mistakes

• Thinking that a profit of 25,000 means you can spend 25,000 today.
• Giving more credit when your cash is low.
• Buying a lot of goods because the price looks good.
• Forgetting that loan payments take cash out of the shop.

What comes next

In Article 5, we look at the goods on your shelves. We show how to keep enough goods to sell, without tying up your cash.

This article is for general learning. It is not personal financial advice.

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