Nice Profit, but No Money? Understanding the Disconnect

Note from Donna…A question that I get all the time is: “where did all my money go?” Accounting is not always intuitive. We can show a profit but be cash poor. That can be confusing and frustrating. Leaning into the financial reports and understanding them is our way out.

While it is vastly important for us to produce the final financials that tax preparers use to process taxes, it’s not my passion. Yes, you heard that correctly, getting your books done isn’t my passion. My passion is help business owner’s get caught up, stay caught up and use the information monthly, weekly, daily if needed to run their business.

What stops business owners from keeping their books up to date? Most of the time it’s a disconnect from getting taxes done annually and what kind of information they can get from the books during the year. I thought I would take a moment and give a “short” list of some of the benefits. This is not meant to be inclusive rather it’s meant to get your thinking about the possibilities.

1. Up-to-date books helps a business owner know if they are on target for making their revenue goals. It’s the number that almost every business owner can rattle off the top of their head. It makes us feel good, but I will confess it’s not my favorite number.
   

2. My favorite number is Net Operating Income – or Net Profit. I’m far more interested and impressed with a nice profit than a large revenue line. Why? Because it tells me a bit about the health of the company.

In the early days of my business, I found the Profit & Loss my favorite report. Now a days, I find rich data in the balance sheet. However, it’s not a report many people understand. What’s so interesting? I’m glad you asked.

1. This is where I find the balance of the bank accounts. Does the company have enough funds to weather an economic slowdown? Did the company’s P&L say there’s a profit, but the bank accounts not reflect it?
   

2. Is there a payroll liability account growing? For example, if the company offers a retirement plan, the payroll deductions are put in a liability account until the funds are paid out to the retirement. If it’s growing, then there is a problem.
   

3. Is the credit card and loans increasing or decreasing? The balance tells us a story about the health of the company. Credit Cards and loans are not bad – leveraging someone else’s money is not taboo in my opinion, however, debt without a plan – that can sink a company.

As you can see, having this information during the year can help you steer the ship in the right direction. It’s the gauges on the dashboard that help you know if something is about to go haywire.

If you’d like to stay in the know of your company’s financial situation and have been lacking the time, knowledge, or discipline, we can help. Schedule a discovery call at www.sooterconsulting.com.