Cash Flow: Where Is the Money Actually Going?

Where Is My Business’s Cash Going?

Have you ever looked over your company’s bank account at the end of the month and thought, “Where is the money going?” If you have, it’s time to sit down and take the necessary steps to figure it out.

You work your tail off acquiring all those customers and revenue, then your hard-earned money seems to disappear. So where is that money disappearing to?

Good news: There is a simple process you can follow to figure it out.

Diving Into Your Company’s Cash Flow

First, I recommend organizing your financial information so it is easier to see where the big buckets of expenses are going. With so many line items, it can be hard to see the forest for the trees!

Create 5-6 groups of expense items, grab the Profit and Loss Statement (also known as P&L) for the last 6-12 months and drop all of your expense line items into those 5-6 categories.

These categories should be the major expense items for your business. Every business is a little different, but for most companies the top 6 categories will be:

  1. People (contractors and employees)
  2. Rent and Other Facility Expenses
  3. Sales and Marketing
  4. General and Administrative/Miscellaneous Office
  5. R&D, Travel, Development Costs, and Subscriptions
  6. Other Expenses

Once you’ve nailed down your categories you’ll want to a) see where the bulk of your money is going and b) decide if the money is going where you expected it to go. Start with the biggest numbers, then work your way down to the smaller buckets.

The goal here is to turn spending into a conscientious, intentional investment in your business activity rather than a reactive, spend as needed and in the heat of the moment, “You need what? Yea yea, just get it,” activity.

Digging a Little Deeper Into Cash Flow

If you haven’t taken a class in accounting (and honestly, why would you if it wasn’t required?) you may find the balance sheet part of your financial statements a complete mystery. I took several accounting classes and still took years to really “get it.” The good news is you don’t HAVE TO “get it” to understand where your cash is going. In fact, I’m going to say something a little crazy. Outside of the cash line item, skip it. For now, at least!

Instead, jump right into the Cash Flow Statement. Most business owners will go the entire life of their business and never look at this important report. I think this is a travesty. The Cash Flow Statement is a shortcut to figuring out where all of your cash is going—it’s right there in the name! First, let’s walk through the key pieces of this amazing report. We’ll start from the top.

Analyzing the Cash Flow Statement

1. Net Income

This item should look familiar. It is the last line item on the Profit and Loss statement and is also called profit (or loss). This is the amount of money your business generated (revenue or income from customers) minus all expenses (including payroll).

2. Balance Sheet Summary

The next few line items in the Cash Flow Statement are simply a summary of what happened on your balance sheet. A balance sheet is a summary of the assets and liabilities of your business. The key areas to look for most business changes in cash are:

a) Accounts Receiveable

If this row is negative, that means even though you earned revenue from a customer you may not have received the cash from them yet. If this number is negative and you need more cash, it’s a good time to follow up with your customers to pay their bills!

b) Accounts Payable

If this row is negative, it means there were more bills paid this month than incurred in that month, meaning if you received a big bill for services from last month and paid it this month, your cash will be affected this month. A positive balance means you have more people that you owe money to this month than you did last month. This can have a positive impact on cash temporarily, but it is important to remember that eventually you will have to pay these vendors.

c) Long and Short Term Liabilities

Look for items related to debt or loans you have outstanding. Loan principal payments are often something we aren’t thinking about because those payments are NOT included in our profit and loss statement. Look at this spot on the balance sheet to know how much cash is going toward these payments!

d) Negative Numbers

Above we covered the most likely culprits of losses in cash, but if you see any other negative numbers on this statement and want to know why they are negative—simply ask your accountant!

3. Total Cash Flow

The final item on the Cash Flow Statement is the total cash flow. This is the change in cash for the month. If your bank account had $1,000 in May, your profit was positive $55 and your bank account had $900 in June, you’d see a negative $100 on the cash flow statement. The difference between your positive profit and your negative total cash flow is in the rows in between (see 2)!

Successful Businesses Know Their Cash Flow

If you have a clear goal for the money (yes, profit is a good goal), it’s easier to say no to things that aren’t really needed to drive revenue or improve employee morale. So if you find yourself wondering where your money is going, set aside some time to dive into your numbers and figure it out. After all, knowledge is power! The more you know about your business’s cash flow, the more successful your business can be.

If you have any additional questions on your cash flow, feel free to book a free consultation with one of our CFOs! Important: Make sure you have QuickBooks Online and that your financials have been updated recently (in the last few months) so we can give you clearer guidance.

You CAN understand your business’s cash flow. You got this!