Daniel HonanFounder, Profitable Painter CPA PLLC · I help painting contractors increase profits & cash flow while reducing taxes♦ Bookkeeping ♦ Tax

Painting Business Owners: The Importance of Knowing When a Sale is an Asset or a Liability

Name: Painting Business Owners: The Importance of Knowing When a Sale is an Asset or a Liability
Uploaded: 2023-08-22T14:07:33+00:00
Duration: 15 s
Channel: Daniel Honan
Description: In this short dialogue, two speakers advise painting business owners on the pitfalls of using bank cash balances as the primary gauge of business health…

22 Aug 2023 · 0 min

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In this short dialogue, two speakers advise painting business owners on the pitfalls of using bank cash balances as the primary gauge of business health. They explain that cash on hand does not necessarily equal profit, especially when owners are heavily reinvesting in equipment, tools, or vehicles, which can depress cash while profits remain strong. They caution that large deposits collected for future work appear as high bank balances but are actually liabilities until the work is performed, potentially giving a false sense of security. While the Profit First cash‑bucket system can be a useful visual tool, it does not replace the need for properly prepared profit‑and‑loss statements and a solid accounting system. The overall message is to look beyond surface cash figures, understand the true financial position, and treat customer deposits as liabilities rather than assets.

A lot of business owners do tend to rely on how much cash they have in their bank account as a tool to make decisions where they should be looking more at their numbers, you know, in their financial statements. A lot of business owners using the Profit First system look at how much money is in the different buckets to get an understanding of how they're doing or what they should do next.
Cash does not always reflect profit. If you are heavily reinvesting into your company, you're buying tools and equipment and new vehicles, your cash is going to be on the low side, but your profits could be high. Checking your bank balances is not going to be a replacement for having a properly prepared profit and loss statements. Does not replace the need to, to have some kind of an accounting system.
Maybe it's the spring and you're taking a lot of deposits for work to be completed in the summer. Your bank balance might be super high. If you're not tied in with your financials, you might not realize that's basically a bunch of liability that you're holding in your bank account because you haven't produced any of the work yet. So it might give you a, a false sense of, uh, comfort to see those really high bank balances, but you haven't actually earned any of that money yet. It's not the summer, you're just taking deposits. ProfitPerSystem, not a replacement for understanding your financials, but it can be a very good tool.