Where did the cash go?

A common question asked by many business owners is: where did the cash go? One common misconception is that net income equals cash. For example, an owner sees net income of $20,000, but the cash balance did not increase by this amount. In fact, cash may have decreased. Why does this happen?

Many business owners focus almost exclusively on the profit and loss statement (P&L) and rarely look at the balance sheet. After all, it is the P&L where all the action is, right? Owners want to know, “Did we make money this month or not?” So, they focus on revenues, expenses, and the bottom line.

While the P&L contains information on revenue and expenses, the balance sheet shows a picture of a company’s assets and liabilities. A lot of cash can be tied up on the balance sheet, which does not hit the P&L. This can cause confusion to business owners.

Cash gets absorbed in working capital (cash, accounts receivable, inventory, and accounts payable). When accounts receivable decreases, cash goes up. When inventory goes up, cash goes down. When accounts payable decreases, so does cash. Some of this may seem counter intuitive but is true nevertheless.

Other places that consume cash that are not on the P&L are principle payments on loans, prepaid assets, prepaid expenses, or deposits. Fixed assets, such as land, buildings, equipment, and furniture consume cash as well.

Some years ago, I reviewed the financial statements with the CEO monthly. His body language checked out after we got through the P&L. As much as I tried to explain that the balance sheet was equally important, he was simply not interested. It was like pushing a large rock up a tall hill. Soon, I stopped going through the balance sheet with him and just took care of it myself. I let him know of any highlights as needed.

What is the most effective way to see where cash went? The answer lies in another financial statement called the Statement of Cash Flows (SCF). This is basically a marriage of the P&L and Balance sheet. It shows all and tells all. The SCF is a little tricky to pull together and understand. But once you do, you will understand the financial aspects of your business better than ever, and better than your competition.

How about your business? Do you know where your cash went? Do you ever look at your balance sheet? Does someone prepare a Statement of Cash Flows for you? Or, do you just look at the P&L and wonder where the cash went?

Every successful business, like a successful team, needs a deep bench of talented professionals to help it succeed. Who’s on your bench?

Contact us to see how we may find cash or cash flow in your business.