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Revenue, profit and cash

Three answers to three different questions, why a month can show a profit and still end with less money than it started with, and how to reconcile the two.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will read one month three ways — what people bought, whether it was worth selling, and what moved through the account — and say which of the three any figure belongs to. You will work out the change in the balance from the sales actually paid for, find the gap between a month's profit and that change, and reconcile the two line by line.

2. What you already have

You can tell creating value from capturing it, and you know that work delivered and work paid for are different counts. This lesson takes the captured part — the money — and shows it is not one number but three, which can point different ways in the same month. Every later lesson on records, statements and forecasts depends on keeping them apart.

3. Words this lesson uses

4. One month, three different answers

A month can show a profit and end with less money in the account than it started with. That is the whole lesson, and it is where owners decide the books are broken.

It is not broken. Profit counts a sale on the day it is made; the bank counts it when the money turns up. When those differ — and for a business that invoices they always do — the two figures come apart, and the difference is the sales made and not yet paid for. Exactly, not roughly, when the month's costs were paid inside the month:

$$\text{profit} - \text{change in the bank} = \text{sales made and not yet paid for}$$

Profit says the trading was sound; the bank says the money is with your customers. Both true, and only one pays Friday's bill.

5. The method, step by step, and how to check it

Fix the period. One calendar month is usual. Everything below is counted inside it.

Revenue first. Every sale made in the month at its price, paid for or not. For a business that invoices, it is the total of the month's invoices.

Then profit. Revenue less everything the month cost: the variable costs of the units sold and the month's fixed costs. This answers whether the trading was worth doing.

Then the account. Money that actually arrived in the month — from this month's sales paid on the day, and from last month's sales that were paid late — less money that actually left. The difference is the change in the balance.

Then reconcile. Where the month's costs were all paid inside the month and nothing was owed from earlier months, profit less the change in the balance equals this month's unpaid sales exactly. Where there are other timing differences — stock bought ahead, a bill paid late, money the owner took out — each one is a separate line in the reconciliation, and the lines must add up to the whole gap. If they do not, something has been left out.

The reconciliation is the check. A profit and a balance that cannot be reconciled mean an error; a profit and a balance that can be reconciled, however far apart, mean only that the money is somewhere other than the bank.

6. The same month, twice

Maya's Ceramics sold 120 mugs at 25 dollars, each costing 13, against 1,200 of kiln, rent and insurance. Forty went to a gift shop that pays later.

The gap of 1,000 is the forty mugs at 25 dollars, sold and unpaid. The left column says keep making mugs; the right says three months of this and the clay supplier stops delivering.

7. Four reasons a balance moves that are not profit

The balance moves for many reasons, and only one of them is the month's profit. Knowing the others stops an owner from reading good or bad news into a number that does not carry it.

A new business is especially exposed. It buys stock and equipment before it sells anything, and its first customers often pay late, so its balance can fall for months while every sale is profitable. That is why so many profitable young businesses fail: not because the trading is bad, but because the money runs out before the customers pay. Growth makes it worse, because every extra month of sales needs stock and costs paid before the extra money arrives. The lessons on cash forecasting later in this course exist for exactly this reason.

8. Closing the gap without touching the price

Once the gap between profit and cash is visible, it can be managed, and most of the ways to manage it change when money arrives rather than how much.

Ask for money earlier. A deposit at booking, payment on the day instead of on invoice, or a term's fees at the start of term all move cash forward without changing the profit. Shorten the terms. Thirty days can often become fourteen, especially for new customers, and a small discount for paying within a week is sometimes cheaper than the line of credit it replaces. Invoice promptly and chase politely. An invoice sent a week late is paid a week late; a reminder the day after the due date recovers most late payments without any argument. Buy stock closer to when it sells. Smaller, more frequent orders tie up less cash, at the cost of some convenience and sometimes a slightly higher unit price. Pay suppliers on their terms, not early. Paying on the due date rather than on receipt keeps money in the account for longer, without being a late payer.

Each of these leaves the month's profit exactly where it was and moves the balance. That is the practical meaning of this lesson: profit is improved by prices, costs and volume; cash is improved by all of those and also by timing, and timing is often the cheapest lever an owner has. Before cutting a price to raise cash quickly, check whether earlier payment would raise the same cash while keeping every dollar of the margin.

9. In the world: a wholesale bakery's first big contract

A small bakery wins a contract to supply 400 loaves a week to three cafés at 2.50 a loaf. Each loaf costs it 1.40 in ingredients and packaging, and the extra fixed costs — a second oven lease and a delivery van — come to 1,200 a month. Over a four-week month it sells 1,600 loaves: revenue 4,000, variable costs 2,240, fixed 1,200, profit 560. The contract is worth having.

But the cafés pay 30 days after the end of the month. In the first month the bakery pays out 3,440 for flour, packaging, the oven and the van, and receives nothing from the contract. Its balance falls by 3,440 in a month that made a profit of 560. In the second month it pays out another 3,440 and receives the first month's 4,000: the balance rises by 560 — the profit, finally showing up a month late.

So the contract needs about 3,440 of cash before it pays a cent, however profitable it is. The owner arranges a line of credit for that amount before signing, and asks the largest café for 14-day terms, which halves the gap. Nothing about the bread, the price or the profit changed; knowing the difference between profit and cash is what kept the bakery open while the contract turned profitable in the bank as well as on paper.

10. In the world: cash-flow failures

Studies of small-business failures repeatedly find that running out of cash is a leading cause, often in firms that were profitable on paper. Customers paying late, stock bought ahead of sales and rapid growth all widen the gap between profit and cash — which is why banks and accountants ask for a cash forecast, not just a profit forecast.

11. Where this goes wrong

Cash read as profit. The balance rises when an old bill is settled and falls when you buy stock. Neither movement says whether the trading works.

Revenue read as profit. We did 6,000 last month names the top line and omits what it cost.

A loss inferred from a falling balance. It falls for four reasons: a loss, a customer who has not paid, stock bought ahead, and money the owner took out. Only the first is a bad month.

Money owed treated as gone. It is usually collectable, and the problem is timing — which deposits and shorter terms change without touching a price.

The gap treated as an error to hunt down. When the month's costs were paid in the month, the gap is the unpaid sales.

12. A month at Neighborhood Kitchen

1. Find the revenue from 750 boxes at 8.

   $750 \times 8 = 6000$

   Counted when sold, whoever has paid.

2. Find the month's costs: boxes at 5 each and 1800 of fixed costs.

   $750 \times 5 + 1800 = 5550$

   Everything the month cost.

3. Find the profit.

   $6000 - 5550 = 450$

   Worth trading, by 450.

4. Find the money that arrived: 100 boxes went to an office on account.

   $650 \times 8 = 5200$

   Only the paid boxes reached the account.

5. Find the change in the balance and check the gap.

   $5200 - 5550 = -350; \quad 450 - (-350) = 800 = 100 \times 8$

   The gap is the unpaid sales, to the dollar.

13. The same arithmetic, the other way round

1. Find Monica's takings for a week, all in cash.

   $\text{takings} = 4000$

   Cash arrived, which says nothing yet about profit.

2. Find the week's costs: crates 3600 and the pitch fee 190.

   $3600 + 190 = 3790$

   Everything the week's sales cost.

3. Find the profit.

   $4000 - 3790 = 210$

   A large number of sales and a thin margin.

4. Next week she trades just as well and pays the wholesaler 1400 for crates bought three weeks ago. Find next week's profit.

   $\text{profit} \approx 210$

   The old crates were already counted in an earlier week's costs.

5. Find next week's change in the balance, with 4000 in and 3790 plus 1400 out.

   $4000 - 3790 - 1400 = -1190$

   The bill for old stock hits the balance, not the profit.

6. Compare the two weeks.

   $\text{profit } 210 \text{ and } 210; \quad \text{balance } +210 \text{ and } -1190$

   They disagree in both directions; the balance ranks the weeks far apart and profit calls them equal.

14. Reconciling a month with several timing differences

1. Northside Repairs made a profit of 960 in May. Write it down.

   $\text{profit} = 960$

   The starting point of the reconciliation.

2. Twelve repairs at 50 were for a company that pays monthly.

   $-12 \times 50 = -600$

   Sales counted in profit, not yet in the bank.

3. April's company invoice of 450 arrived in May.

   $+450$

   Money in that belongs to last month's profit.

4. He bought 300 of screens for June.

   $-300$

   Stock bought ahead reduces the balance, not the profit.

5. He took 400 out for himself as a sole proprietor.

   $-400$

   Drawings are not a cost, so they do not touch profit.

6. Add the reconciling items to the profit.

   $960 - 600 + 450 - 300 - 400 = 110$

   The predicted change in the balance.

7. Check against the bank: May's balance rose by 110.

   $\text{bank change} = 110$

   Every dollar of the gap is explained, so the books are sound.

15. Your turn: Northside Repairs, 80 screen replacements at 50 dollars

1. Parts and fees are 18 a repair and fixed costs 1600. Find the profit.

   $80 \times 50 - (80 \times 18 + 1600) = 4000 - 3040 = 960$

   Revenue first, then cost.

2. Twelve repairs were for a company that pays monthly. Find the money that arrived.

   $68 \times 50 = 3400$

   Only the paid repairs.

3. Your turn: work this step out. Its working is at the end of the packet.

   Find the change in the balance and check the gap.

16. Guided practice

Six sentences about Bright Home Cleaning's March. Sort each one by which of the three questions it answers.

17. Guided practice

Complete the worked solution: a business sold $128$ units at $9$ dollars, each costing $5$, with $398$ of fixed costs, all paid in the month. $27$ of the units went to a customer who pays next month. Read the month three ways.

1. Find the revenue.

   $9 \times 128 =$ _r

   Everything sold, paid or not.

2. Take off the month's costs for the profit.

   $(\text{revenue}) - 5 \times 128 - 398 =$ _g

   Profit is revenue less what the month cost.

3. Find the money that arrived.

   $9 \times 101 =$ _i

   Only the paid units reach the account.

4. Take off the money paid out for the change in the balance.

   $(\text{arrived}) - 1038 =$ _b

   Money in less money out; it can be negative.

5. Check the gap equals the unpaid sales.

   $(\text{profit}) - (\text{change}) = 27 \times 9 = 243$

   The two figures differ by exactly the sales not yet paid for.

18. Guided practice

At Monica's Market Stall last month, profit was $250$ dollars and the bank balance moved by $-250$. How many dollars of this month's sales have been made and not yet paid for?

Answer:

19. Practice

Neighborhood Kitchen made a profit of $450$ dollars last month, and yet there is less in the account than there was at the start of it. What happened?

• $100$ of the $750$ lunch boxes sold have not been paid for yet
• The profit figure must be wrong, because a month that ends with less money did not make a profit
• The $6000$ dollars of sales was recorded as profit, so there was never a profit at all
• The month made a loss, and the falling balance is the proof of it

20. Practice

Monica's Market Stall sold $200$ crates of mangoes at $25$ dollars last month; $20$ of them are not yet paid for. The month's costs of $4750$ dollars were all paid inside the month. By how many dollars did the bank balance change?

Answer:

21. Practice

Neighborhood Kitchen sold $750$ lunch boxes last month at $8$ dollars each. Each one cost $5$ in materials and fees, and the month's fixed costs were $1800$. Of the $750$ sold, $100$ went to customers who pay at the end of next month; everything the month cost was paid inside the month. Fill in the month read three ways.

22. Somewhere new

A tutor taught $35$ hours last month at $30$ dollars an hour. $6$ of those hours were drop-in lessons paid on the day; the other $29$ hours go on a bill the families settle at the end of term. Travel and printing cost $2$ dollars an hour, and the room and the online platform cost $248$ for the month, all paid inside the month. Fill in her month.

23. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

24. Test question

Maya's Ceramics sold $120$ mugs last month at $25$ dollars each. Each one cost $13$ in materials and fees, and the month's fixed costs were $1200$. Of the $120$ sold, $40$ went to customers who pay at the end of next month; everything the month cost was paid inside the month. Fill in the month read three ways.

25. What you can do now

You can lay a month out as revenue, profit and the change in the balance, and explain why a profitable month can leave you with less money. Tell someone what the gap between profit and cash is made of, and what it means for what you can commit to next week. Next: the jobs one owner is doing at once, and what they actually want out of the business.

Working for the steps left to you

15. Your turn: Northside Repairs, 80 screen replacements at 50 dollars, step 3