Your P&L says you made a profit, so why don’t you have any cash? Here’s the answer: Your P&L does not reflect cash activity. Rather, it reflects what you invoice customers and what your vendors invoice you (Income, COGS and expenses). Your Balance Sheet will show bank accounts, assets, liabilities and equity. Your Statement of Cashflow will show you how actual payments (in and out) affect your cash.
Let’s break it down referencing the attached picture (we’ll use a few line items as examples):
Net Income: this is taken directly from your P&L. This is a calculation of all recorded income/COGS/expense transactions; customer invoices from you, vendor invoices to you, etc.
Adjustments to reconcile net income to net cash provided by operations:
Accounts Receivable – this example shows that Larry’s Landscaping received $31,503 LESS than what the P&L indicates (invoicing vs. actual payments) (Loss in cash)
Accounts Payable – Larry’s Landscaping paid out $1,498.25 LESS than vendor invoicing on P&L (Accounts Payable vs. actual payments made) (Gain in cash)
Financing Activities: in this example, we see loan payments and owner draws. While the interest of a loan will show as an expense on a P&L, the principal and escrow payments will only show on the Balance Sheet. Owner draws are equity accounts and are not reflected on the P&L.
Net Cash Increase for Period - here’s the calculation:
Net Income + all Adjustments to Reconcile Net Income…+Financing Activities
Cash at End of Period – here’s the calculation:
Net Cash Increase For Period + Cash at Beginning of Period
Is your head spinning a bit? The important thing to remember is that the health of your business is reflected in three main reports; P&L, Balance Sheet, and Statement of Cashflow. Regularly reviewing these three reports will give you a better understanding of where your money is, and help you make sound business decisions.
Of course, we are always here to assist you with balancing your business so you can balance your life.