Where’s the cash?

Where’s the cash? Several years back, I had a client ask me if I’ve made $500,000 in profit why isn’t it in the bank account? A very good question I’m sure many of us have wondered. While profits are great, they don’t cover payroll, other operating expenses, bank loan payments and owner’s distributions. Cash does. So doesn’t it make sense to not only track where your cash is in the same way you track where your profit is? There’s an under utilized financial report called the cash flow statement that tells you exactly where your cash is going.

In Quickbooks, it’s called the statement of cash flows and it’s divided in to 3 separate categories: operating activities, investing activities and financing activities. On the cash flow statement if the number is positive that means cash went up and if it’s negative that means cash went down. Let’s talk about these:

If a business billed a little over $1 million, but receivables went up $100,000, so the cash flow statement only reflects $900,000 in cash collected from sales.

The cost of sales was $564,000, but accounts payable went up $92,000. So, the cash portion of the cost of sales was $472,000. The operating expenses were $445,000. So, the total cash flow from operating activities was

$900,000 cash collected from sales, net of the AR increase

  • 472,000 cost of sales, net of the increase in payables
  • 445,000 operating expenses

-$17,000 cash from operating activities

As you can see, the business used $17,000 in cash before any purchase of fixed assets (investing activities) or loan payments or owner’s distributions (financing activities).

Even though this business made a $42,000 profit for this period. Because of the $100,000 increase in accounts receivable, the business owner doesn’t have the cash to cover 100% of operating activities, let alone investing or financing activities.

To make the situation more difficult the business had to come up with another $30,000 in cash to cover loan payments and owners distribution. By looking at the cash flow statement you can discover that days sales in AR had increased from 52 days to 65 days robbing the business of the potential cash that it could’ve had if they had collected better for the period. If you want to know where your cash is, the statement of cash flow/cash flow statement is a great tool to diagnose where it’s sitting.


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