Jan 17 Relying on Just Your Profit and Loss Statement Will Make You Broke As a CPA, I meet with a lot of business owners, and it never surprises me when I hear them say “we have a profit, but I never have any cash!” It’s definitely a real concern…and there’s a relatively simple solution. First off, make sure your accounting is right. As the old saying goes, garbage in, garbage out. Next, start looking at your cash flow statement. The cash flow statement is kind of a combination of your profit and loss statement and your balance sheet. Unfortunately, the way accounting works, you can show a profit on your profit and loss, but have no cash. The cash flow statement tells you why. Finally, take a look at three simple calculations and see how to make them better: 1. Days sales outstanding – tells you how long it takes you to collect your accounts receivable 2. Days payables outstanding – tells you how long it takes you to pay your bills 3. Days in inventory (if you have inventory) – tells you how long your inventory sits on the shelf before it’s sold So, let’s say it takes you 45 days to collect accounts receivable, you pay bills within 10 days of receipt, and inventory sits on the shelf for 60 days. If you order inventory on January 1st, then according to above you pay the bill on January 11th, you sell it on March 1st, and you collect the accounts receivable on April 14th. This time period between January 11th and April 14th is called your “cash gap,” which is basically the time period when your cash is tied up with no interest. And you wonder why you have no cash? It’s all either sitting on the shelf or in accounts receivable! So, your goal should be to track these ratios…and make the days sales outstanding and days in inventory as short as possible, and days in accounts payable as long as possible. When you shorten this cash gap, you will literally transform your business.