How a PROFITABLE business runs out of money!
How did the Profitable Business run out of money?
Your 2021 numbers are likely complete by now...so this can be helpful:
You should “know your numbers”…but one of your financial reports can tell a lie…
…knowing how each report plays a part in telling the FULL story of the financial health of your business can prove critical!
The top 3 Reports are:
Balance Sheet
Profit & Loss Statement (P&L)
Cash Flow Statement
Let’s dive into the potential "lie" in your Profit & Loss and Cash Flow Statement!
What is a Profit & Loss Statement?
Measures the profit in your business over a period of time. You add up the revenue…subtract expenses…the remainder is your profit or loss.
What is a Cash Flow Statement?
Measures the cash received…subtracting cash paid out…over a period of time. Simply put…measurement of cash moving IN and OUT of your business.
Back to the Riddle…
How did the Profitable Business run out of money???
Because it was making payments that are NOT on the Profit & Loss Statement!
Some important transactions are left OFF the P&L!
Namely...Debt!
The principal portion of debt is NOT on your P&L statement.
Here’s an overly simplified example:
Let’s say you were launching a new group coaching program and you spent $100,000 for independent contractors, funnels & social media ads…and you put that on a credit card to pay for it.
For simplicity we will say…you pay back the credit card balance with $10,000 each month and interest is $1,000/month. ($9,000 = Principal & $1,000 = Interest)
On your P&L, all you will see is an expense of $1,000 each month (just the interest).
However, the principal that is applying to the debt will NOT be there.
Essentially giving you a $9,000 loss in cash but not to “profit”.
So when you check your next few months of P&L what will you see?
Next month, if you sold $10,000 worth of group coaching ($10,000 of new income) and had no expenses…all your P&L will show is an expense of $1,000 credit card interest…and $9,000 worth of Profit.
But you that $9,000 is NOT in your bank account...
In real life…$10,000 left your bank account for credit card repayment…and despite what the Profit & Loss statement told you…
...your bank account is at $0.
Imagine in the second month you only sell $8,000 worth of coaching sales…
P&L will show a $7,000 profit (only $1,000 worth of interest expense is shown)…
but in real life you are in the red, you need to pay out $10,000 for credit card
...so now your bank account is actually -$2,000.
That’s how a “Profitable Business” can actually run out of cash.
You have to pay attention to BOTH your Cash Flow & P&L reports, because they each tell an important story about your business. If you ignore one of them, you might be missing critical information.
Need helpful organizing and understanding your Profit & Loss Statement OR Cash Flow Statement?
My team can do all of this for you!
Best
Pat
Disclaimer: This is meant to be educational only. It is NOT advice for your specific situation. The examples used were overly simplified for education purposes. Please speak to a qualified financial professional if you have questions about your financial reports.