How much money did we make? If there is a more asked question in business, I’d like to know what it is. It captures the whole point of a business, which is, to make money. The way that most businesses know how much money they make is through their P&L. A P&L is an acronym for a “Profit and Loss statement. Which like the name suggests it is a statement of the profit and/or losses. However, while critical, there is also another, even more critical piece of the company that gets neglected until the last moment and that is cash.
What is Cash
I know, you know what cash is. It’s what people used to use to buy stuff before credit cards became a thing. But besides US Bank Notes, what else can be considered cash? Well “cash” in the accounting sense, include things like hard/paper money, petty cash (small amounts of cash), bank accounts and even high yield interest accounts and money market accounts. Which could also be considered an investment, but it’s really considered cash. In an accounting sense, cash is what you use to pay your employees, vendors, landlord, etc. to keep performing the services that they perform. Which hopefully facilitates the multiplication of said cash.
Why Cash is More Important Than The P&L
Well simply put if you can’t pay anyone then your business can literally not exist. It won’t matter how much money you made in previous years or what the budget is, or what the trend is for the business. No cash, equals no business. Of course, one can logically guess that if you are making money then your cash balance should be growing. However, it’s still important to monitor your cash balance and compare it to what your bottom-line profit is and what it was last year. For example, having a large decrease in cash while making money on your P&L could be a sign of an accounting error somewhere for your business. Or it could be a sign of a bunch of draws that are sucking money out of your business.
Processes to Help Monitor Cash
Once you understand that cash is the lifeblood of all businesses (or at least businesses that can’t just pull in venture capitalist funding whenever they want), you realize that you need to keep track of it. The issue is though, how does the average small business owner do this? Well, the answer is surprisingly simple. For one, a simple comparison to monitor the increase and decrease in cash and see if it close to your bottom-line profit/loss minus any owner draws is a good start. Also, a good goal to aim for is to reconcile each account quarterly/yearly. It’s probably enough for small businesses to reconcile yearly. Which allows you to ensure that you’re working off good numbers when you go to file the tax return. However, if you have a large small business, you can probably hire an accountant/or maybe couple of accountants to reconcile your bank accounts.
Also, when I say bank reconciliation what I mean is taking your bank account and comparing that you your balance in your accounting software. For most small businesses this should be a pretty simple process. If you’re doing correctly, it should be as easy as giving it a quick check. However, when you have outstanding checks and missing transactions, that gets a little bit more complicated. In fact, you may want to hire an accountant to help you with your accounting, bank recs and other things like taxes as well.
Conclusion
In conclusion, I think of cash as a health barometer, yeah everyone likes to look at the profit and loss report, but the issue is that lots of small business owners only focus on that one piece. There is a shocking amount of business owners that will not even pull a balance sheet. This is an issue because if you’re missing half the financial statements then you really have no proof that your P&L is correct. In fact, I would argue that if you can’t tie out your balance sheet that there are probably accounting errors in your profit and loss statement. If you’re looking for a qualified CPA, I enjoy helping my clients reach their financial goals, reducing their administrative work.