First off, this is a question we hear a lot. You’re making sales, customers are happy and your profit and loss statement (P&L) shows you’re making money. The thing is, your bank account tells a different story. You just want a good idea of how your business is doing financially, but it’s hard to get a clear picture. There are multiple places your cash could be, so let’s explore where it actually goes.
You’ve made a purchase that isn’t reflected on your P&L
If you’ve made any major business purchases lately, there’s a good chance they haven’t been counted as an expenses. Certain items are categorized as assets which go onto your balance sheet instead of your P&L. These include:
- Property
- Upgrades to buildings
- Vehicles
- Equipment
- Machinery
- Fixtures
Let’s say your P&L tells you you’ve made $250,000. This doesn’t reflect the $100,000 you spent on a new equipment, because this is an asset. This cost won’t show up on your P&L, but you will find it sitting on your balance sheet.
Liability is showing as profit on your P&L
If your P&L says you’ve made $500,000 but you don’t know where that money is, it could be that you’ve spent cash paying down your liability.
If you pay down $50,000 on your line of credit for the equipment you purchased, you’re reducing your liability. This still shows up as profit on your P&L because you’ve already taken the expense in a prior period.
You’ve taken money out of your business for non deductible expenses
When drawing money out of your company, it’s essential to know what is and isn’t tax-deductible. If you take out $15,000 to pay for a family vacation to Hawaii, that’s totally unrelated to business purposes and isn’t tax-deductible.
The $15,000 won’t show up on the P&L and will instead appear as a profit distribution on your balance sheet, hidden from view. In other words, it’ll make it seem like you should have more cash than you do, but this isn’t the case.
If you only look at your P&L, you won’t get a true reflection of profitability
Never rely on your P&L when creating budgets or forecasting. It’s not a good indication of the amount of money you have and could inaccurately influence decisions.
For example, your P&L might say you have plenty of cash to hire a new team member, but this doesn’t take into account the money you recently spent on assets. The same goes for the figure in your bank account; it’s not a true picture of what you actually have, so don’t rely on it to inform decisions.
Great bookkeeping shows you exactly where your cash is
Clean, clear books are one of the most powerful tools a business owner can have in their arsenal. They give you a goldmine of financial insights.
Running a business without these insights is like driving a car blindfolded. You know where you want to go, but you don’t have direction and pretty much have to hope for the best.
Approach bookkeeping as an investment in the future of your business. It lays the foundation for success and helps you forecast better, create accurate budgets and make informed decisions.
Find a CPA who tailors your bookkeeping to you
Bookkeeping isn’t just for compliance and tax purposes. If the data is organized so a financial expert can understand it but the business owner can’t, it’s useless. First and foremost, your bookkeeping is to help you understand how your business is doing financially.
When we build out our clients’ books, our priority is that the numbers speak to them. This could look like:
- If your business has two partners, setting up an account for Partner 1 and Partner 2 so you can see when someone takes expenses out of the business.
- Reflecting asset purchases like equipment and vehicles on your P&L for clarity.
- Using a variety of accounting tools to give you valuable reports with greater detail than you can get in QuickBooks.
Laying out your accounting in this way gives you access to the most relevant insights. You’ll be able to see on one sheet of paper where every penny is going, so you’re not lost trying to figure out your profitability.
We go back in and move things around for tax purposes, but that comes secondarily. Our priority is that you have good, clear numbers you can make sense of.
It’s time to prep your business to thrive
Numbers are our thing at Sundack – but we’ll never treat you like one.
We get to know you, your business and your goals to give you the very best support to achieve them. Whether that’s by helping you make sense of your numbers or providing expert counsel for the big decisions, we’ve got your back.
Start by filling out our contact form . From there, we’ll arrange a time to jump on a call and see if we’re a good fit. We can’t wait to get things going.