Where Is All the Money Going Series: Chapter 1 - You're Working Hard. The Business Is Busy. So Where Is the Money?
Written by: Melissa Cunliffe (CA)
Why a busy, profitable business can still leave you wondering whether you are actually getting ahead
There is a question we hear from successful business owners more often than you might expect:
We're making money… so where is the money all going?
The business is busy. Sales might be growing. There are employees to manage, customers to look after, suppliers to pay and decisions coming at you every day.
Your accountant might even tell you the business made a healthy profit. Yet when you look at the bank account, it doesn't always feel that way.
There may be another tax bill around the corner. The overdraft never seems to disappear. Customers owe you money. Equipment needs replacing. The business loan is still there. You are taking money out personally, but perhaps not as much as you imagined you would when you started the business.
And despite years of hard work, you may occasionally find yourself asking:
Are we actually getting ahead?
If that sounds familiar, this guide is for you. Because one of the biggest misconceptions in business is that making a profit and building financial prosperity are the same thing. They are not.
A business can be profitable and still struggle for cash. It can grow sales while becoming financially weaker. It can pay a lot of tax while the owners still feel they have little to show for it. It can own significant assets while carrying too much debt. And it can provide a very good income without ever building meaningful wealth outside the business.
Understanding where the money goes is therefore about much more than reading a profit and loss statement. It is about understanding how your business fits into the bigger picture of your family, your wealth and your future.
The Question Behind the Question: Where Is the Money?
When a business owner asks 'Where is the money going?', the answer is rarely one thing. The money may be disappearing into:
low margins
wages
overheads
loan repayments
interest
stock
work in progress
slow-paying customers
tax
GST
equipment purchases
personal drawings
investments
property
superannuation
business growth
the day-to-day cost of running a bigger business
None of those things are necessarily bad. The problem is when you don't know where the money is going. Because if you don't understand what is consuming your cash, you cannot confidently decide what to do next.
Should you employ another person? Can you afford the new machine? Should you reduce debt? Could you buy the property next door? Are your prices high enough? Should you be investing outside the business? Can you afford to bring your children into the business? When could you retire? Is the business actually creating wealth for your family?
Those are not simply accounting questions. They are Future Prosperity questions.
The 3P's Future Prosperity Approach
At 3P's Future Accounting, we believe good accounting should do much more than tell you what happened last year. Compliance matters. Your accounts need to be accurate. Your tax returns need to be completed. Your BAS needs to be lodged. Your obligations need to be met.
But compliance is the foundation. It gives us the facts. The real value comes from using those facts to make better decisions about what happens next.
1. GOALS — Where do you want to go?
Before analysing the numbers, we need to understand what success actually looks like. Do you want to grow? Reduce debt? Work less? Buy another business? Purchase property? Bring children into the business? Create investment income? Sell? Retire? Keep the business in the family? There is no point recommending the fastest route until we understand the destination.
2. FACTS — Where are you now?
What does the business earn? What does it own? What does it owe? What cash does it generate? How much tax is being paid? What are your margins? What is happening with debt? What assets sit outside the business? What does your family actually own? Good decisions require good information.
3. OBSTACLES — What is standing in the way?
It might be poor cash flow, low margins, too much debt, inefficient tax structures, insufficient working capital, slow-paying customers, business assets being unnecessarily exposed, no retirement plan, no succession plan, owner dependence, family uncertainty, or simply not having a clear financial plan.
4. RECOMMENDATIONS — What are the best moves available?
Once the goal, facts and obstacles are clear, we can start considering options. Not every strategy is right for every family. Good advice should consider the whole picture.
5. DECISIONS — What are we actually going to do?
Advice without action rarely changes anything. What needs to happen? Who is responsible? When will it happen? How will we know it has been completed? Good advice should not finish with a meeting. It should result in progress.
3P'S FUTURE PROSPERITY INSIGHT
PRESERVE
Preserving is about strengthening the foundation: cash-flow control, profitability, tax efficiency, debt management, good compliance, understanding your numbers and identifying opportunities before they are lost. For this book, Preserve is where we begin.
PROTECT
Once the foundation is stable, we consider risk: structures, asset protection, insurance, debt, estate planning, succession and family considerations. Cash and financial resilience are protection tools too.
PROSPER
Prosper is about turning today's success into tomorrow's choices: growth, investment, retirement, business value, next-generation readiness, exit and legacy. It begins with understanding the money.
More Sales Don't Automatically Create More Wealth
Imagine your business increased sales from $2 million to $3 million. At first glance, that sounds fantastic. Sales have increased by 50%. But perhaps you needed another employee, more vehicles, additional equipment, more stock, extra administration, larger premises, more finance and significantly more working capital.
Your $1 million increase in sales might have required an enormous increase in cost and financial risk. You may be selling more without making proportionately more. Worse, you may actually be making less on each dollar of sales.
Turnover measures activity. Profit measures performance. Cash flow measures financial reality. Wealth measures what all that effort is ultimately creating.
The Growth Trap
Business owners naturally celebrate growth. More customers. More contracts. More employees. More turnover. But unmanaged growth can consume cash at an extraordinary rate.
The faster a business grows, the more money it may need to fund wages, suppliers, stock and the gap between doing the work and being paid. The business can be growing successfully while the bank account becomes more stressed.
Is the growth actually creating prosperity?
The Family Business Complication
Family businesses add another layer. The line between business money and family money can become blurred. The business may pay for vehicles, phones, travel, property expenses, loan repayments, superannuation, investments, family wages or other expenditure connected with the owners.
A family might genuinely be building significant wealth even though cash in the business feels tight. Or the opposite might be happening: the family may have a high income and lifestyle while very little long-term wealth is actually being created.
The business is not the end goal. The business is one of the vehicles used to create the life and future the family wants.
Ask Yourself
Do you know how much cash your business genuinely produces each year?
Do you know your gross profit margin?
Do you know which products, services, jobs or customers are most profitable?
Do you know how long your customers take to pay?
Do you know how much working capital your business needs?
Do you know how much debt the business can comfortably carry?
Do you know what your family takes from the business each year?
Do you know how much tax you are likely to pay before the tax bill arrives?
Do you know whether your personal net wealth is increasing?
Do you know whether the business is becoming more valuable?
Could you explain where last year's profit actually went?
If several of those questions are difficult to answer, it may simply mean the business has reached a stage where better financial visibility is required.
A better question than 'Where is all the money going?' is: Is the money our business generates taking our family closer to where we actually want to go?
Book a Future Prosperity Meeting with 3P's Future Accounting today and gain clarity, confidence and a clear plan for your future.
Preserve. Protect. Prosper.
Disclaimer
This article does not constitute financial advice and is for general information only. It does not take into account any individual’s personal objectives, situation or needs, and is not intended as professional advice. Any similarity to an individual’s personal circumstances and the examples provided in this article is purely coincidental. Any person acting upon such information without receiving specific advice, does so entirely at their own risk.
Authorisation under an Australian Financial Services Licence (AFSL) is not required in the provision of this article and the author plus Future Accounting Group Pty Ltd is not acting in its capacity as an Australian Financial Services Licence holder
Liability limited by a scheme approved under professional standards legislation.
