"My
income statement shows a profit and I'm constantly busy. SO WHERE THE HELL IS
ALL THE CASH?!"
-
Business Owners Everywhere
The following is a post from my friend and colleague Tony
DeSimone. If you have ever uttered the words above take special note to this
post.
August 25, 2015
Anthony DeSimone
WHERE THE HELL IS ALL MY CASH?!
I'm currently working with the owner of a restaurant. Back
in 2013, Jeff was feeling very confident about his business because the
restaurant made a profit of about $50,000. That confidence grew even stronger
as Jeff's business continued to do well at the start of 2014. All of that
changed, literally overnight, when tax time came and Jeff had to pay his 2013
Federal and State tax bill.
He quickly realized he had no cash and then made a statement that
many business owners make. He said, "My
income statement showed a profit, we were constantly busy but we never seemed
to have any cash. Where the hell is all the cash?!"
(My comment: This a common problem for many business owners and the main reason only 20% of small businesses make it to their 5th year anniversary. They make a profit but they run out of cash.)
One of the primary reasons this occurs is because of the disconnect
business owners have between how the inflows and outflows of cash get recorded
on the financial statements.
The income statement shows only half of the cash picture.
Many business owners (like Jeff) ignore the balance sheet. It's a common
mistake. The income statement and the balance sheet are connected. Even
if you don't understand how, or why, from this point forward, just remember
that those two statements are connected and in order to get a full picture of
how your company is doing, you have to understand how to read both income
statement AND balance sheet.
The two together make a great pair but even trained CPA's have to
learn how to read those two documents to see where the cash went. So how can I
expect you to learn that? I can't - read on.
Jeff thought he had $50,000 in cash because of his $50,000 profit
but during that year, he used most of that cash when he paid down some of his
debt and purchased new equipment in the restaurant in the amount of $45,000.
Paying down the principal on his debt and buying equipment are not
accounted for on the income statement, therefore, they did not affect his
"profit", both of those actions were accounted for on the
balance sheet. Had he understood both reports, he might have figured it
out but, like many business owners, he didn't know how to read those reports.
OK, I know what you're thinking - "This is beginning to get
real confusing" - and that's exactly why so many business owners ask,
"Where the hell is all the cash?!"
The concept behind how the balance sheet and income statement work
as a pair is difficult enough for students majoring in accounting - it's far
more difficult to teach an individual who not only isn't majoring in it but
really has no interest to learn.
There was no way that I was going to be able to teach Jeff the
intricacies of how the income statement and balance sheet work together - so I
didn't. Instead, I taught him how to properly track and forecast cash
flow.
So my advice to you if you're struggling with getting your arms
around where all the cash is, don't waste your time trying to learn how to read
the income statement and balance sheet.....at least, don't start there.
Start with focusing on cash flow. It's far more advantageous and
here's why:
- There's no disconnect between the
inflows and outflows of cash and where it gets recognized on the income
statement or balance sheet.
- It doesn't
matter if you used the cash to buy equipment (a balance sheet item) or to
pay the utility bill (an income statement expense) because when focusing
on cash flow, every dollar received or spent is treated the same way.
- When focusing
on the "ins" and "outs" of cash, the timing issues
created with accrual accounting are nonexistent
- It's easier to track cash on a
timely basis
- The owner
doesn't need to wait for a report to be created at the end of the month,
the owner can review the bank cash detail immediately
- You can operate your whole
business with just focusing on and tracking cash
When I met Jeff, his line of credit was tapped out at $75,000 and
he also borrowed $70,000 at a very high interest rate from his credit card
company. He was struggling to pay payroll and losing sleep.
Jeff had absolutely no experience in accounting but he learned how
to operate and maintain the very user friendly cash forecast spreadsheet in
three, one hour sessions. Once fully implemented, Jeff had a tool that gave him
clarity on his current cash position and, more importantly, the expected cash
balance months into the future.
Jeff was no longer paralyzed with uncertainty and immediately
began making decisions and changes which played a pivotal role in helping him
to completely pay off his credit card balance and line of credit debt.
But, even without implementing the cash flow spreadsheet, here are
some things, you can do to get your arms around your cash and understand it
better:
- QuickBooks (and most other
accounting software programs) creates a standard Statement of Cashflows
report. Print it out and review it at least monthly.
- This report
will show you the 'ins' and 'outs' of all the cash from both the income
statement and balance sheet.
- Upon receiving your monthly bank
statement, immediately review it for anything that looks unusual.
- Review your payroll registers
every pay period for anything that looks unusual.
- If you ask your bookkeeper a
question and the answer doesn't feel right - investigate further until
you're satisfied.
- Upon receiving your monthly
credit card bill, immediately review it for anything that looks unusual.
- Don't give your bookkeeper check
signing authority - sign your own checks.
So forget the balance sheet and the income statement. Start
with focusing on cash flow! Master that and you'll never ask "Where the
hell is all the cash?!" again.
You too can have the same vision and clarity to confidently make
the proper changes in your business and begin slowly to actually see a growing
cash balance on your bank account.
My addition:
If you are interested in learning more about his cash flow
forecasting tool, you can contact Tony at
Regards,
Rick Wallace
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