Cash: Do you know where it comes from? Where it goes?

Your new salesperson just landed a new client. Happy days! However, she promised the customer two new buses to be used exclusively for the account. For a young company this creates a bittersweet emotion. The potential income is exciting, but can you afford the payments? Looking at last year’s income statement you determine that you are profitable enough to afford a 10% down payment and the monthly payments. It is close, but you are willing to take the risk. So you eagerly order the buses and prepare to make more money!

You are crushed and confused when the lender, who was so eager to take your business, only approves you for one bus. How can that be? He tells you that you will not generate enough cash to make the payments on two buses.

He explains that when you figured your net income to pay for the new buses, you did not subtract the annual debt portion of your existing bus loans, your property mortgage, and the money you owe your original angel investor. Even when you add back the depreciation expense you are short.

Disgruntled, you leave with “I am making money, but I don’t have enough cash!” We have heard this any number of times. Well, “making money” or “being in the black” is interchangeable with making a profit. However, having a profitable enterprise does not always correspond with positive cash flow. Conversely, businesses showing a loss can generate cash.

Many times your numbers are just this close. An industry CPA understands this and will prepare you for such expansion requests so that you can plan accordingly and without surprises. Are you ready for the expansion? How much can you afford to borrow? What will the expansion do to your operation? Perhaps this new opportunity and the expected revenue will generate enough additional cash to make the new payments. Was this figured into the loan request? Did you prepare a proposed income statement adding in the new revenue and expenses attributed to the new opportunity?

The Statement of Cash Flows is just one of the basic financial statements provided in CPA prepared financial statements. This is one of the reports that you really can’t get through QuickBooks without significant analysis and manipulation. Let’s look at the components that determine cash generation and uses.

Transactions that PROVIDE or BRING IN CASH include the following:

  • Cash sales
  • Accounts receivable collections
  • Borrowing cash
  • Cash sales of owned equipment
  • Expense refunds
  • Income tax refunds

Transactions that USE CASH include the following:

  • Maintenance payments
  • Sales refunds
  • Cash used for bus purchases
  • Taxes paid
  • Fuel payments
  • Debt and interest payments
  • Wages paid
  • Insurance payments

Common income statement items that DO NOT PROVIDE OR USE CASH:

  • Credit sales
  • Fuel and other expense accruals
  • Taxes accrued
  • Depreciation and amortization expense
  • Unrealized gains or losses

Let us at BUSBooks help you learn where your cash comes from and where it goes! Together we can move you forward.

The next Nerd News will discuss Budgets – Why are they an invaluable tool for your continued success.

Written by Tracy Fickett, CPA and Peter Shelbo, Veteran Bus Operator

BUSBooks is a unique CPA accounting firm dedicated to the motorcoach industry.