My projected profit and cash balance are different. Why?

I recently had a call with a client to discuss their financial performance for the month of August. During the call, she asked a question I get regularly, “Why is my projected profit $200,000 but my projected cash balance will only be $100,000 at December 31st?”.

This is a great question. After all, if you’re expecting to turn a profit of $200k, you should see $200k in your bank account, right?

Right - unless, that is, your business has any debt. In this case, the business had about $50,000 in credit card debt and another $50,000 in other various types of liabilities.

The question was prompted in part by the fact that the client had landed a large piece of business and wanted to start aggressively paying off debt. Given the size of cash infusion that was expected to be received, the client expected that the bank balance would be much larger that it would actually be when we modeled out the cash balance.

While the cash balance would have been $200,000 had the business decided to not pay off the $100,000 in liabilities, the cash balance will end up being closer to $100,000 after the debt has been satisfied and paid.

When projecting the cash balance of your business you should always consider money that is used to acquire new assets, pay off debt, or be distributed to shareholders or owners. These transactions do not appear on your profit and loss statement and for that reason many entrepreneurs do not know to prepare for them. 

Doing so will ensure that you have enough cash on hand to finance operations and that you don’t run out.

Sammy Soto