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I’m Donna Bordeaux with Calculated Moves. I am often asked why a bank balance does not equal the profit in the business after the month is done. So, let’s take a moment to go through a little bit of a flow of how cash flow works and why it’s different than profit?
Using this chart as (an example, which differs slightly from the video) this is one of the tools that we utilize that provides feedback to our clients on how things are going more graphically. In this example, we see that it indicates that revenue for this particular month was around $23,500. The client had a cost of sales reduction of $2,250 which was probably due to a return or something small. We won’t worry about that for now. They spent money anywhere you see red, which is spending of money, not an inflow of cash. In this example, they spent about $13,800 which are all things like the normal expenditures in day to day business; rent; payroll; keeping the lights on; those kinds of things.
And that’s typically where people think the profit part stops; and, it may. But that is not the only thing that affects your cash flow. And, that’s where people get really confused. So, things like paying taxes or setting aside money for taxes also affecting cash flow. In some cases, you can have an increase in your accounts payable so you owe more money to vendors and didn’t spend the cash. If there was an entry on this line, it would be where they just accrued the liability and this would look like they paid down something. Maybe they paid off a credit card or paid down a credit card or a debt; or, maybe made loan payments.
In some cases, you could have a change in inventory by stocking up on some inventory before the end of the year. Now that netted a cash flow effect of free cash of $8,173 in this example.
From there we look at Assets. If you buy things like fixed assets or have some closing costs on loan or make some investments and it’s also going to affect your cash flow, not necessarily your net profit though. There are also maybe have some interest in this case, the change in retained earnings or other equity. These would be distributions that the owner took out of the business. So, they took the cash flow because they had to spend it on their personal bills. This is a big one that affects cash flow that so many owners overlook when you take the money out of the business in ways other than the traditional expenses like payroll. You’re reducing the available cash flow. So be careful that you still have money left over to cover the taxes and pay all the other expenditures in the business the following month.
So, in this case, free cash flow, the business generated almost $8,200 in cash, but the owner took out $4,200 in distributions. So, the net cash flow was $3,973. So, if we were looking at the bank statement in this situation, we would see that the bank balance from the prior month should have $3,973 more in it at the end of the month, then at the beginning. Therefore, for this retailer, they were able to add a good bit of cashback into their balance. But this is something you want to keep in touch with and watch over. If you are concerned about cash flow, we have a lot of solutions we can help you with and a lot of strategies to make sure that cash flow is not an ongoing issue for your business.
Donna Bordeaux
CPA with Calculated Moves
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.
