Guest Post by Cyndi Thomason of bookskeep

“Show me the money!”

Can’t you hear Cuba Gooding, Jr. saying that line? The line I hear from my clients is similar, “My P&L shows I made a profit, so where’s my money?!” It’s a common question we get from clients, and it’s a common misconception that all profits lead directly to money in the bank. Let’s debunk that myth and get clear on the difference between profit and cash flow.

Let’s start with your bottom line. Looking at your P&L (Profit and Loss Statement or Income Statement) you will see your Net Income or Net Profit. That is the amount you have left from your sales after you pay for the products you sold and deduct the expenses needed to run your business. This is the number many business owners equate to cash in the bank.

To get a true picture of your cash, you need to look at your Balance Sheet, too. The Balance Sheet is a summary of your business over its lifetime. It is more than the current year information. If you want to understand how your Balance Sheet has changed over time, I recommend printing out the Balance Sheet from the last date of your business for the prior year. For example, December 31, 2017 would be the date for most businesses operating on a calendar year basis. Then print the Balance Sheet for the current year to date. Compare the bank account balances from last year to this year. Do you have more money or less? Let’s assume your cash increased. There’s your money, right? Not so fast!

You must also look at your liabilities. Liabilities is the big word for money you owe. If you have Amazon or Kabbage loans and credit card debt, this means that you were spending someone else’s money instead of your cash. To understand more of this story, do the same exercise for liabilities and compare last year’s liabilities balance to your current liabilities balance. Do you owe more than last year? For our example, let’s assume you owe less.

Now you need to compare the difference in your cash to the difference in your liabilities. If your cash went up and your liabilities went down, that’s a good news story. It also tells you that some of that bottom line money went to pay down debt. Another scenario is that your cash went up and so did your liabilities. That situation means your cash increased, and you are using someone else’s money to pay for expenses. Finally, the sad news story is that your cash decreased, and your debt increased. In that case, your P&L may be showing a negative bottom line. Your business is in trouble and you need to get control of your income and or expense side of your P&L.

The final area you need to examine is the Equity section of your Balance Sheet. Most small businesses will have Owner or Partner Contribution and Distribution accounts. Compare these accounts from last year-end to the current date. Did you have to add money to your business or are you taking money out of the business? Depending on the type of entity you have, your pay may show up on the Balance Sheet as an Owner Distribution and not on the P&L report. So, if you have a P&L bottom line of $50,000 this year to date and you paid yourself $60,000 so far this year, your cash will go down by that amount.

When I complete a Profit First Assessment, which tracks how the cash flows, I commonly see people paying themselves with their cash while all of their operating expenses are on credit cards. This is not a healthy sustainable business. It’s a house of cards that will fold unless the business model is improved.

Below is an illustration of the reports you will need to pull from your accounting system to show you were your money goes. This illustration is for a business using the modified cash accounting method for the purpose of matching revenue and product costs. This means that inventory is recorded as an asset on the Balance Sheet until it is sold. Once the goods are sold, an entry is made to reduce the inventory account and record the Cost of Goods Sold on the P&L. As the business saying goes, “Cash is King” so you need to know where the King hangs out to get on top of your business financial health.

Example

Profit and Loss Shows Net Income of $15,520:

The Balance Sheet report below shows a column for December 31, 2017, the end of the prior year for the client, and a column for September 12, 2018, the current year-to-date information.

Quick Calculations

Bank Accounts: $18,753 – $30,826 = $-12,073; the bank account decreased

Liability Accounts: $8,420 – $4,341 = $4,079

Owner Contributions: $43,767 – $30,467 = $13,300

Owner Distributions: $105,234 – $56,493 = $48,441

Net of Owner Contributions and Distributions: $48,441 – $13,300 = $35,141 cash reduction to the business

Analysis

Based on the P&L Statement, this business has a profit this year to date of $15,520. This means the business operations generated cash. When we look at the Balance Sheet, the cash in bank accounts has decreased and the liabilities or debt has increased. Typically, this indicates a business that is not profitable. However, we note from the equity section that the owner has taken $35,141 out of the business this year. The cash generated from the business this year is not sufficient to meet the owner’s cash demands; therefore, debt has increased to meet this need. This is not a long-term sustainable approach, and the business needs to evaluate other ways to meet the cash needs of the owner.

Are you looking for clarity in your balance sheets? Ask our experts!

Cyndi Thomason – bookskeep

All great journeys begin with a single step.

For bookskeep, that step was our very first Amazon client. I enjoyed working with them so much that through consistent referrals, I began partnering with more Amazon sellers every month. I quickly realized something: Many Amazon pros are pursuing the same flexible lifestyle I am. From that realization was born one of our primary goals at bookskeep—to loosen the financial grip your business has on you so that you can enjoy your life as you build your business.