Business owners always want to know where their money is going, and rightfully so. An owner needs to know if the company has enough cash to pay all the costs of running their business. They often turn to the Profit & Loss Statement to get the answers. However, a business could report the net income on the Profit & Loss Statement but does not have the corresponding amount in their bank account. While the Profit & Loss Statement reports the categories for most expenditures, it does not accurately represent all the cash entering and leaving the bank account.
There are many reasons for this, but the main reason is not all expenditures are reported as expenses on a Profit & Loss Statement. A few of the most common examples are mortgage/note payments, large asset purchases, and owner’s draw/personal expenses.
Mortgage and note payments are a combination of principal and interest. When a $1,000 payment is made toward a mortgage or note, the cash reduces your bank account by $1,000. However, only the payment’s interest portion is reported on the Profit & Loss Statement as interest expense. The principal amount is reflected on the Balance Sheet decreasing the outstanding liability. This can cause confusion because the Profit & Loss Statement is only reporting the interest expense and not the principal, giving an illusion that you have spent less cash.
Large equipment purchases are reported on your Balance Sheet as fixed assets, so only the depreciation expense will be reported on your Profit & Loss Statement. The actual dollars spent on the equipment purchases are not reported on your Profit & Loss Statement. This can cause confusion also because depreciation is not an actual “money” expense. This is a calculation of writing off the actual cost of the equipment over time.
Owner’s draws or personal expenses are paid with company funds but are not company business expenses. These expenses are not reported on the Profit & Loss Statement but are reported in the capital section of the Balance Sheet. By using company funds, you reduce the company’s cash, but it is not reflected in the company’s overall expenses.
Another reason a Profit & Loss Statement and a Cash Flow Statement would not reflect the cash balance in your bank is if the accrual method of accounting is being used. An accrual-basis Profit and Loss Statement will report income billed but not yet collected and expenses incurred but not yet paid.
A solution to know where your money is going is to create a Statement of Cash Flows. A Statement of Cash Flows will start at a specific date with the actual cash balance and reports all incoming and outgoing cash. There will be sections reporting net change from operations, financing, and investing activities during the accounting period. The ending balance will be the current cash on hand. For example, on January 1, 2021, you have $100,000 in the bank. You pay your mortgage for $1,000 (principal $800 and interest $200), office expenses of $20,000, payroll of $30,000, and owner’s draw of $4,000. You also collect payments from your customers of $50,000. With a Statement of Cash Flows, you would see you have $95,000 left in the bank. On the other hand, the Profit & Loss Statement would report a net loss of $200.
What can you do? Owners should review a Cash Flow Statement in addition to their Balance Sheet and Profit & Loss Statement regularly. The Cash Flow Statement provides a more accurate look at where money is going each month and is important in making business decisions, such as paying off a debt or making a big-ticket purchase. It can also provide insight into a company’s long-term financial health and viability.
Shannon Grabill is the Supervisor for ATKG’s Client Account Solutions (CAS) practice. She has more than 20 years of accounting and office management experience. Her industry experience includes real estate, legal, and nonprofit. Shannon earned her Bachelor of Arts in finance from Texas State University. For further information on this topic or to explore your business’ CAS needs, please contact Shannon at email@example.com or 210.733.6611.
‘‘My father and I have used ATKG since the days of its founder James Ahern, and they have always provided excellent and accurate advice.’’
‘‘I can't name just one reason about Eric and Hayley! Their proactivity, creativity, collaborative spirit, and communication are all absolutely incredible.’’
‘‘Everyone that I have worked with at ATKG is extremely friendly, helpful, and always very responsive!’’
‘‘We appreciate ATKG's responsiveness, timeliness, and good communications’’
‘‘Very personable and knowledgeable. Over the years, I have created great relationships with Teryn Grater, Diane White, and the seniors and managers on my account.’’
‘‘I call them my ATKG team!’’
‘‘I couldn't be happier with the choice to move from EY to ATKG. A.J. Sturm, Diane White, Alisha Bell, and the support staff have been instrumental in helping me with a complicated Estate and Foundation scenario. Not only have they provided me with phenomenal accounting and tax advice, but they have also gone above and beyond to help me plan for today, tomorrow, and far beyond. Thank you, ATKG!!!’’
‘‘We continue to consider ATKG a part of our personal and business planning team. They are a professional firm with an impeccable level of service.’’
‘‘ATKG is very professional, responsive, and client-oriented. They are committed and make a point to communicate with annual meetings and anytime I have a question.’’
‘‘Angie Stone and her team provided valuable forensic accounting services and excellent litigation support in some complex family law cases handled by our firm.’’
‘‘Angie Stone and Courtney Mastin are prompt in their response to any inquiry our clients or I may have. Additionally, everyone at ATKG maintains a wonderful level of professionalism.’’
‘‘Great people, good response time, and helpful’’
‘‘Excellent customer service. Rapid response to questions!’’
‘‘Great people and very informative, up-to-date with ever-changing rules and guidelines in this ever-changing government!’’
‘‘ATKG is invested in my success and is highly responsive to my needs.’’
‘‘ATKG offers great customer service.’’
‘‘Prompt service and excellent forecasting. I also feel that I get tremendous support, more than I have received in the past.’’
‘‘Katie provides great service and is very knowledgeable.’’
‘‘Been working with ATKG for several years; they are extremely professional, knowledgeable and offer great customer service.’’
‘‘ATKG provides services up and above any other accounting firm I have ever used. They want to help their clients manage their wealth and offer to help teach their children about wealth and how to manage it.’’
‘‘She is friendly, responsive, and knowledgeable.’’
‘‘David and the ATKG team are knowledgeable regarding current tax issues, and they are extremely responsive to all questions.’’
‘‘A. J. is professional, knowledgeable, and provides friendly assistance.’’
‘‘Eric and Sarah do an excellent job handling our account and promptly answering questions. They are proactive in planning meetings and looking forward.’’
‘‘Our ATKG team, which includes Eric, Ruth, Katie, and Shannon is incredibly knowledgeable, professional, and supportive of our business. Client service always feels like it is at the forefront of their mind.’’
‘‘Loyal, excellent service over 35 years with Melanie and her team.’’
‘‘Our interactions with Diane and the ATKG team are always a model for how a professional services company should interact with its clients. With ATKG, we know that our finances are in good hands.’’
‘‘Melanie, Teryn, and Sandy have clearly had my and my family's best interests at the forefront. I have had a 19-year relationship that has proved to be very beneficial to my family and me.’’
‘‘Melanie, Teryn, and Katie offer us confidence.’’
‘‘Diane and Shannon are a critical resource and partner to our firm. They are knowledgeable, responsive, and dependable on all levels.’’
‘‘Diane and Shannon provide great service. They are very knowledgeable and are always willing to assist our group with sage advice.’’
‘‘Teryn is always quick to respond to questions and on top of the latest accounting rules.’’
‘‘Amanda and Shannon offer us consistent communication’’
‘‘Great work, timely, and the best part....nice folks!’’