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Where’s the Cash?

Worry about cash flow is one of the top issues that keeps business owners up at night. Cash flow is like oxygen to a business and without it, the business won’t survive.  

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 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 into 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.  

For example: 

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

Let’s then say the cost of sales was $564,000, but accounts payable went down $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, minus the AR increase. Subtract $472,000 for cost of sales (minus the increase in payables), and another $445,000 for operating expenses. 

That leaves us -$17,000 from all operating activities together, meaning 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. 

A situation just like this one happened to a client of mine. To make the situation more difficult, the business had to come up with another $30,000 in cash to cover loan payments and owners’ distributions. By looking at the cash flow statement they discovered 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 exactly it’s sitting. 

The cash flow statement can be one of the most confusing pieces of business financials, but you don’t have to figure it out alone. Let’s talk today to walk through yours together. 

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