IF YOU WERE on top of your financials for 2019, you may have already received a nice thick wad of papers from your CPA detailing your financial performance for last year. Included among the documents will be a profit and loss and balance sheet along with details of your tax returns and what you may owe the IRS (or what they may owe you).
Chances are, like most people, you might have a quick thumb-through then put them to one side for later reading. If you do get back to looking at them (and many of you might not look at all), you may be asking yourself the No. 1 question that most people ask when looking at their financial results: “If I’ve supposedly made money, how come I don’t have any cash to show for it?”
You’re not alone. Most businesses notice an anomaly between their profit and the amount of cash that appears in their bank statement. A profit of $100,000 seldom ends up as an extra $100,000 in the bank balance. This is because not all expenses and income are recorded as such in the year in which they are incurred.
Inventory is a great case in point. The cost of an item of jewelry is only recorded as an expense when it is sold (when it can be matched with the income it generates at the time of sale). This means a diamond bracelet that cost $5,000 to buy will reduce the bank balance by $5,000 but not record as an expense against profit until it sells — which may be a year or two after it is brought in, if the item isn’t a quick seller.
The easiest way to see what cash comes in and goes out is to view a Cash Flow Statement. This is a report your CPA can prepare for you that shows all money that has come in for the year and all money that goes out, including personal expenditure and assets that might be bought. It gives you a better way of seeing where your money has come in and how you have handled it once it arrives.
For most jewelers, cash-in closely correlates to sales — after all, we are fortunate to be in a business that is largely cash-based. The real benefit of this report is in viewing the outgoings. A report such as this will more clearly show how cash is being handled.
A cash flow statement (your CPA may use a different name for it such as a Statement of Cash Flow or Statement of Changes in Financial Position) is not something you may need as part of your financials every year, but getting one from time to time may help explain how your cash flow is working and what changes you may need to make to keep more of it in your business.