A short instructional video transcript by Donna Bordeaux (Calculated Moves) explaining why a company’s bank balance often differs from reported profit. Using a charted monthly example (a retailer in December), she walks through revenue (~$40,000), operating spending (~$18,000), inventory build (+$3,300), accounts payable/other liability changes, owner distributions, and how these items produce free cash flow versus net cash change.
Questions this video answers
Approximately $40,000
About $18,000
$3,300
$18,991
$2,340
Chapters
Hi, I'm Donna Bordeaux with Calculated Moves. I am often asked why a bank balance does not equal the profit in the business after the month is done. So I wanted to take a moment to go through a little bit of a flow of how cash flow works, why it's different than profit. So this is a chart that we utilize in one of our tools that gives feedback to our clients on how things are going in a more graphical way. So this indicates that revenue for this particular month was around $40,000. Okay. So the client had a cost of sales reduction. So this was probably due to a return or something small. We won't worry about that for now. But they spent money anywhere you see red is a spending of money, not an inflow of cash. Okay, so they spent about $18,000. Those are on things like the normal expenditures in day to day business. Rent, payroll, keeping the lights on, those kinds of things. Alright, so that's typically where people think the profit part stops. And it may, but it's not the only thing that affects your cash flow. And that's where people get really confused. So things like paying taxes or setting aside money for taxes, those also affect cash flow. In this case, they had an increase in their accounts payable, so they owe more money to vendors. And they didn't spend the cash, they just accrued the liability. In the other current liability, this change, the negative 1133, looks like they paid down something. So maybe they paid off a credit card or paid down a credit card or a debt. Okay. Or maybe made loan payments. In this case, they also had a change in inventory, so they stocked up on some inventory before the end of the year. So that resulted in their physical count showing that they spent another $3,300 on inventory. Okay. Now that netted a cash flow effect of free cash of $18,991 in this example. Now if you buy things like fixed assets or have some closing costs on a loan, or make some investments, that's also going to affect your cash flow, not necessarily your net profit, though they also maybe have some interest. In this case, the change in retained earnings or other equity. These would be distributions that the owner took out of the business. So they took the cash flow because they had to spend it on their personal bills. This is a big one that affects cash flow that so many owners overlook. When you take the money out of the business in ways other than the traditional expenses like payroll, you're reducing the cash flow that's available. So be careful that you still have money left over to cover the taxes and pay all the other expenditures in the business the following month. So in this case free cash flow, the business generated almost $19,000 in cash but the owner took out $2,340 in distributions. So the net cash flow was $16,652. So if we were looking at the bank statement in this situation, we would see that the bank balance from the prior month should have $16,652 more in it at the end of the month than at the beginning. That's a nice healthy way. And this happened to be a good month in December for this retailer so they were able to add a good bit of cash back into their balance. But this is something you want to keep in touch with and watch over. If you are concerned about cash flow. We have a lot of solutions we can help you with and a lot of strategies to make sure that cash flow is not an ongoing issue for your business. Thank you very much and I hope this helps. Have a great day.
