I Made a Profit – Where’s the Cash?


Ruth King Photo SmallerYou look at the bottom line of your profit and loss statement every month and see that your company has a profit. You see profits month after month yet you run up against a cash crunch – payroll, or in this time of year, having to pay your taxes.

You just don’t understand how your company can be profitable and you don’t have cash.

Here’s the answer: Profits are just that – profits. It means that your revenues were greater than your expenses. A loss is where expenses are greater than revenue. Neither means that you have cash. Profits are a P&L item; cash is a balance sheet item. The two are very different.

So, how do you get cash? Here is the detailed explanation: a revenue/sale (P&L) turns into an accounts receivable (balance sheet) when you bill for the work you did. Then you must collect for the work you did (balance sheet). If you are COD, your accounts receivable instantly turns into cash (balance sheet). When you get your vendor invoices you enter them as an expense (P&L) and create and accounts payable (balance sheet). Then you must pay your accounts payable (balance sheet) and hopefully you have cash left (balance sheet).

Most companies experience months where your company showed a loss yet there is still cash in the bank. The opposite is also true: There are times where your company shows a profit and you are having problems scraping enough cash together to pay payroll.

Here’s a growth rule of thumb: You need 10% of your projected growth in cash to fund the growth. If your plan is to grow by $250,000 in a year, you need $25,000 in cash to fund that growth. The cash is used for increased inventory, increased accounts receivable (if your company is not a COD company), increased overhead expenses, and potentially a vehicle or other fixed asset purchase.

Profits don’t pay the bills. However, profitable work is necessary to pay the bills. Collect for your profitable work quickly, pay your bills associated with that job, and stay solvent.