Where’s my money?

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This is a question I encounter many times when reviewing the cash flow and profitability of a business with either the entrepreneur or person running the business. It is usually followed by a very frustrating conversation that involves going through accounting terminology and concepts that are foreign to the person I am speaking with. Once the frustration subsides there is usually some excitement about what can be done with this new found knowledge and while it can be difficult to follow the cash flow and profits of a business the work is worth the effort and can produce improvements in profitability and overall value.

Where is the cash going in your business…specifically?

All of the cash your business generates will end up somewhere on your balance sheet. All of your profits (and/or losses) move from your profit and loss statement to any number of places on your balance sheet and at regular intervals you may be curious about where the actual profits went. Did they pay down some debt or were they used to purchase some equipment? Maybe the profits are sitting in your bank account and haven’t been used yet. Whatever the case may be it is important to know where the cash in your business goes and what it gets used for.

The natural push back from entrepreneurs and people responsible for running a business is that they have “financial” or “accounting” people that take care of knowing where the cash goes. While this may be true a high level understanding of how profit moves through your business is important to know if you hope to build a valuable business. If you don’t know how your business uses its profits then you could be missing out on opportunity to improve and ultimately generate more profit.

As an example, one of the most obvious gaps in where profit (or net revenue) goes can be the difference between payables and receivables. Many businesses sell a product or service today but receive payment at some future point in time. Even though the specific sale may have generated some profit the profit is not actually available to the business because somehow the business needs to pay for its costs while it waits for payments from customers or clients. The difference between payables and receivables can result in interest charges from vendors that are not being paid on a timely basis. In some businesses the gap between payables and receivables can grow and become unmanageable which can lead to a business converting their payables to a longer term loan through a bank or lender. The costs associated with setting up a term loan can include commitment fees, brokerage fees, interest, etc.

Another example that tends to come up all the time is the personal income and/or expenses of the business owner(s) or entrepreneur. Whether the cash leaves the business through payroll, a company credit card or a straight draw the cash taken by an owner can often times be untimely and can skew the profitability of a business. It is not uncommon for a business owner to exclude their pay or draws from a business when discussing profitability however that can be unfair representation of a business. A business owner does fulfil a role that if left absent would need to be filled and would require paying someone to fill it. This can be a tough issue to address because a business owner tends to think of their business finances as an extension of their personal finances instead of as an investment that produces a return. The profits that leave a business and end up in the hands of the owner(s) can produce losses in some cases. This happens because a business doesn’t have a good handle or policy in place for remunerating the owners.

Whatever stage your business is currently at, it is important to have a high level understanding of where the cash and profits in your business are going. It’s not as important to have a detailed knowledge of the accounting entries but being able to explain in simple terms where the money goes will help you make better decisions going forward and may shine some light on some historical challenges your business has faced.

If your business is trying to figure out where it’s cash is going, get in touch with us. At mlenow.ca we we believe accessing money can help your business do more and helping you get a handle on your cash flow will result in higher profits and a more valuable business.

You should visit mlenow.ca because every business needs access eventually needs access to money.

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