Cash Flow vs. Profit

Ask a small business owner what is more important, cash flow or profit. In our experiences, most will answer profit. Many times we hear, “why am is my company struggling because I am showing a PROFIT”.

Profit can be deceiving because if the company is keeping records on the accrual method of accounting, their “profit” could be in their accounts receivable. Thus, their business may not have money, or “cash” to meet their financial obligations.

To demonstrate what we mean, if the company uses QuickBooks, change the reporting method to cash basis. Bye, bye profit. Accounts receivable needs to collected at a rate equal to or exceeding monthly expenses, otherwise no profit using the cash method.

Most small businesses are better served being cash basis because the income statement will give them a better sense of company performance. While cash basis does not include accounts payable, a cash basis income statement will show a company owner where they are spending cash, rather than what they have incurred in unpaid bills.

A cash basis income statement will also reveal future issues. For example, if the income statement is showing a negative “profit” (or a loss), one might inquire as to how the business owner is meeting obligations. Typically the owner is pulling funds from other sources like credit cards, lines of credit or home equity (ugh!). This scenario creates a future problem because it demonstrates that the business owner is not cutting expenses inline with revenue. This is a tipoff to a potentially bleak future.

So the answer is, to the small business owner, cash flow is more important and relevant.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today’s small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it.

Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission.

Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations.

She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.

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