By Chloe DiVita
…much less than many people think.
If you are a small business owner who struggles with understanding the difference between a profit or loss, and the cash that sits correspondingly in the bank, you’re not alone. The most common financial statement my clients ask for is a Profit & Loss statement. But, when they see that there is a bottom line profit of $10,000 with very little cash in the bank they ask, “How can that be?”
While there are many circumstantial answers to that question, it often comes down to accrual accounting and understanding your Balance Sheet. If you look at your Balance Sheet and see your current accounts receivable balance at $12,000, you’ve found your missing cash. It hasn’t been received yet. Or maybe you purchased a large piece of equipment that is being capitalized. In other words, you forked over a large amount of cash for this piece of equipment, but don’t get to take the full expense right away. Either way your cash is low. It’s either been spent without being expensed, or it’s not been received yet.
The opposite can be true as well. A bottom line loss, does not always equate to no cash in the bank. Maybe you just invested some money into your company, or took out a loan to cover some expenses, or had a customer give you a large deposit for work not completed yet. There are many ways to see a loss on your Profit & Loss statement while still having plenty of cash in the bank. Talk with your accountant if you would like to know more about your specific company’s situation.
Stayed tuned for some advice on making better sense of financial statements. Especially the Balance Sheet, which seems to be less understood than the Profit & Loss.
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