Where is my money?

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.

Statement of Cash Flow

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.

Statement of Cash Flow

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 sgrabill@atkgcpa.com or 210.733.6611.

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