Every month we grab a question from one of my clients and answer it briefly here and more in-depth in our monthly newsletter.
Today, Samantha asked: “I don’t understand why my tax accountant shows I had a $38,000 profit and yet I know I don’t have nearly that much in the bank in cash. What gives?”
Awesome question! Here we go:
"It’s basically the difference between profits and cash flow. You, as the business owner, want to really understand your cash flow to make better decisions.
For the purposes of Profit First, “Profit” refers to the cash you retain in your business or distribute to owners/shareholders rather than the amount shown on the Profit and Loss Statement. The reason for this is you can show a “profit on paper,” and yet not have the money in the bank to match the bottom line of your P&L Statement. This is due to acquisition of assets, reduction of debt, and owner’s draws and distributions, all of which show up in different accounts on the Profit Assessment and don’t show up at all on the P&L Statement."
In this week’s newsletter we go through an example of this and how you can be looking at your numbers from a cash perspective instead of from your P&L Statement. Too many business owners look at the P&L only and think they are doing great but scratch their heads as to why they think they never have any money.
So if you want to get more tips and more detailed explanations of common financial literacy conundrums, sign up for our newsletter.
P.S. Have you done your Profit First bank account allocations? It's fun isn't it?