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Show A "Profit" But Don't Have Any Cash?

By Sean M. Hugo, CPA

In business cash is king so it is very important to have an understanding of where all your cash is going.  When you look at your profit and loss do ask yourself if I made that much money where is it?  Many business owners don't realize what the profit and loss statement is telling them and what is worse they don't realize what it is not telling them.

The profit and loss statement doesn't reflect all the uses of cash.  For example, did you buy any fixed assets during the year?  If so they should have been recorded on the balance sheet and not the profit and loss statement.  Over time the asset purchased will be depreciated and that will show up as an expense on the profit and loss statement.

Another scenario of using cash that doesn't appear on the profit and loss is loan payments.  When you make your loan payment the payment should be broken down into two pieces the principal repayment and the interest expense.  The former doesn't show up on the profit and loss statement.

Another factor could be that you are looking at accrual based financial statements and comparing that to the cash you have in the bank.  Assume at the end of 2009 you had $20,000 in accounts payable assuming those payables were related to expenses they would be recorded on the profit and loss in 2009.  When you look at your profit and loss for 2010 you are not going to see that use of cash.

So what should you look at to monitor your use of cash?  You should examine your Statement of Cash Flows.  This report shows all the cash that comes into a company and all the cash that goes out of a company.  The Statement of Cash Flows is made up of three categories:

  • Cash flows from (used in) operating activities
  • Cash flows from (used in) investing activities
  • Cash flows from (used in) financing activities

Study your Statement of Cash Flows and post and be sure to post any comments or questions you have.