Where Did the Cash Go? | Financial Intel | The Contractor's Bookkeeper

Cash is King! Cash is essential. But cash can also be misleading. As a stand-alone measure, it tells you nothing about a business. Small business owners who manage their businesses by looking only at bank balances aren’t getting any real insight into their businesses.

Ten Days, Two Very Different Bank Balances

I used to own an Air Conditioning (AC) contracting firm. We specialized in service, maintenance and replacements. We bought our materials and equipment on account from the supply houses throughout each month and then made payment for these purchases on the 10th of the following month. So, on the first of each month we were always rolling in cash — it was common to have $100,000 in the bank. But on the 11th, it was common to have only $20,000 in the bank after paying our suppliers. Same company, same performance, but two very different cash balances 10 days apart.

The Bigger Trap

Or take the example of a company that raised $1,000,000 in start-up funding. Two years later, the bank balance is $700,000. That looks like a great balance, but it could reflect a business that experienced a net $300,000 loss in its first two years of operations.

What To Do About It

Looking at cash balances alone doesn’t tell you how your company is performing. It tells you today’s balance, nothing more. Owners must pay attention to every line item on the Profit and Loss Statement and Balance Sheet if they really want to know what’s happening with their company.

Same company, same performance, but two very different cash balances 10 days apart.

Frequently Asked Questions

Why does my bank balance swing so much month to month?

Because payment timing to suppliers (and from customers) moves cash around without reflecting your actual profit or loss — the business can perform identically and still show very different balances a few days apart.

Is a healthy bank balance the same as a healthy business?

No. A company can have a good-looking balance and still be losing money underneath it — a strong balance can just as easily reflect unspent funding as it can profit.

What should I look at instead of just the bank balance?

Every line item on the Profit and Loss Statement and Balance Sheet. The bank balance alone tells you today’s number; it doesn’t tell you how the business is actually performing.

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