/ IFRS guide
Why Trading Companies Don't Know Their Real Profit
Profit is an opinion, cash is a fact — and most trading businesses are relying on the wrong one to make decisions.
Ask a trading company owner what they made last month, and most answer with a bank balance, not a profit figure. The two are rarely the same number, and confusing them is one of the most common — and expensive — mistakes we see in owner-managed trading businesses.
Cash movement isn't profit
Paying a supplier, receiving a customer payment, and drawing on a credit facility all move cash without necessarily reflecting the period's actual profit. Profit follows the accrual basis: revenue is recognized when earned, cost when incurred — not when cash physically moves. A strong bank balance can sit alongside a loss-making month, and a tight bank balance can sit alongside a genuinely profitable one.
Four places real profit hides
- Landed cost not fully allocated to inventory — see our guide on landed cost
- Inventory counted at the wrong value, or not counted often enough, so cost of goods sold is a guess
- FX gains and losses buried in the wrong account, or never recognized until year-end
- No accrual for costs incurred but not yet invoiced — freight, commissions, utilities
What decision-ready profit looks like
- Reconciled to a bank position that is itself fully reconciled
- Inventory valued at accurate landed cost, counted and compared to book on a regular cycle
- FX differences recognized in the period they occur
- A monthly management accounts pack you'd be comfortable showing a bank
None of this requires more bookkeeping effort than you're already spending — it requires spending it in the right order, starting with the bank reconciliation.