My business is profitable, where is all my cash??

Many businesses are profitable but still rely on loans, owner investments, and other sources of cash in order to keep the doors open. Many people come to me asking why their business has no money even though they are profitable?? The short answer is not all money that goes into and comes out of a business show up on your Income Statement.

Your profit is how much your business makes from daily transactions, which is what your Income Statement shows.  So this includes income or revenue from customers and clients and expenses such and rent, advertising, etc.  However, your Income Statement does not show actual cash received and spent by a business. This is shown on a Statement of Cash Flow.  Here are some examples of the difference between Profit and Cash Flow.

Negative cash flow

Marjorie owns a flower shop that sells flowers to many local businesses. She gives them 30 days to pay for the flowers after they are delivered. One month she has $5,000 in flower orders that she invoiced and delivered, but has not received money for. Her total revenue for the month was $20,000, and her total COGS and expenses were $15,000. So on her Income Statement, it shows a Net Income (or profit) of $5,000. However, she has not actually received cash for $5,000, so she broke even with her cash flow and had $0 at the end of the month. Even though her business was profitable for the month, she has zero cash.

Dan owns a restaurant in a tourist town, so his business is very seasonal. One month in the summer, he had a Net Income of $10,000 on his Income Statement. However, during that month, he paid $1,000 in principal on loans, paid down his credit cards by $5,000, paid himself $4,000, and paid payroll taxes from the previous quarter of $3,000. So he had to pay a total of $13,000 to accounts that don’t show on the Income Statement, bringing the cash flow to a negative $3,000. Again, his business was profitable, but he spent more cash than he received for the month.

This is just a very basic look at cash flow vs. profit. Contact me if you want help with your own profitability and cash flow!