I Made a Profit - Where's the Cash?
You 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 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).
Some companies experience months where the company showed a loss yet there is still cash in the bank. The opposite is also true: There are times where the company shows a profit and you are having problems scraping enough cash together to pay payroll.
Warning: Even though your P&L shows a profit month after month, you can grow your company out of business. This happens when you run out of cash and don't have a line of credit or recurring revenue savings to cover temporary cash shortages.
Did you check your bank accounts on line today? This is the first step in protecting your hard earned cash.
I have a deep understanding of Profit and Loss Statements and Balance sheets - and I can explain them in simple, easy to understand language.
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