Cash Flow vs Profitability!


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If you are a salon owner asking “Where’s all the Money”, what you’re really asking is where’s all the “cash” you feel should be in your checking account. The real answer will be found in the remaining installments of this series. However, at this point we need to establish clarity on the difference between “cash flow” and “profitability”. Let’s discuss profitability first.

When you get your P&L (Profit & Loss) statement from your accountant or your tax return at end of the year, the bottom line or “net margin” technically shows the profit or loss for that time period. This, unfortunately, is not the actual amount of cash you did or did not make. This is an evaluation of the complete financial value of your business during the specific time period. It’s accepted accounting procedure as mandated by the Internal Revenue Service and federal guidelines.

Yes, it does show legitimate “expense”, but you have to understand what we may think of as an expense and what federal guidelines say is a legitimate expense are often two different things. One simplified and acceptable definition of expense is “it must be consumable”. For example, the electricity you paid for this month was consumed in use as was the water you paid for through your local utility. However the new shampoo bowls you bought this month for $5,000 are not consumable, at least not 100% at the time of payment. So what are they? They are now an asset on your balance sheet and assets on your balance sheet at the time of taxes are, in essence, taxable. The value they maintain against the depreciation your allowed is, in essence, part of your profit and you will be taxed accordingly. OUCH!

What this series is NOT intended to be is an accounting 101 class, we’ll leave that up to your accountant, that’s what you pay them for. But I gave you this example to help you understand the difference between profitability and cash flow.

Cash flow defines exactly what it says, the “flow of your cash”, where all the real money really is and/or where it’s all gone. That’s where you’ll find the answer to our question. Your accountant can create this for you with a complete analysis of your P&L and balance sheets, but, of course, this is an extra service with an extra charge. I prefer to have owners set it up as such and manage it themselves. Waiting on your accountant to do it can take longer than desired. I’ve helped owners set up their cash flow analysis in everything from a simple Excel sheet to QuickBooks.

Here’s the bottom line. However you do it, knowing the status of your real cash flow at all times is critical in the life of any small business. It’s critical to winning the game. And as in any game, if you don’t know where you’re at it’s very difficult to plan and set course on the successful direction in which you need to go!

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