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Profit is an Opinion, but Cash or
lack thereof is Cold Hard Reality
Dennis L. Thompson, CPA, CFE
206-390-9432
www.dlthompsoncpa.com
@dennislt
Common Question By Owners
• If I am making so much money, how come I
don’t have any cash?
Agenda
•
•
•
•
•
•

Types of Accounting
Breakeven Analysis & Ratio Analysis
Operating Cycle – Cash to Cash
Mechanics of Projecting Cash Flow
Drains on Cash
Solutions
Underlying Themes
• The Importance of a Basic Understanding
of Accounting
• Having Accurate Accounting Information is
Critical
• Being Able to use Your Accounting
Information to Make Business Decisions
What is Financial Accounting
• Production of Financial Statements
– Income Statement
– Balance Sheet
• Bookkeeping
• Used for Tax Returns
• Designed for External Audience
– Bankers
– Tax Collectors
– Creditors and Investors
• Backword Looking
What Is Management Accounting
•
•
•
•
•
•
•

Analysis of Costs - Breakeven
Projection of Cash Flows
Budgets
Ratio Analysis
Designed for Internal Audience
Forward Looking
The Information comes from your
Accounting System and Reports
Cash vs Accrual
Financial Statements-Compass
For Your Business
• Think of Your Business as a Small Plane
• Think of Your Accounting System as an
Instrument Panel
• Two Potential Problems
– Your Accounting Info is Wrong
– You Don’t Use Your Accounting Info
Categories of Financial
Statements
•Income Statement
– Where You Have Been
•Balance Sheet
– Where You Are Now
•Cash Flow Projection & Budgets
– Where You Are Going
• Statement of Cash Flows
• Do You Have a Viable Company
Profit & Loss - Comparison
Balance Sheet - Comparison
Balance Sheet - Comparison
Statement of Cash Flows

Increase
Increase

Increase

Decrease

Decrease
Analysis of Costs - Breakeven
• Sales Price Per Unit or Service
– How much Gross Income per product or
service.
• Variable Cost Per Unit or Service
– What are the Directs Costs associated
with the product or service
• Fixed Costs (Overhead)
– Costs that need to be paid whether you
make a Sale or not, e.g. Rent, Insurance
Breakeven - Example
•
•
•
•
•
•

Sales Price Per Unit
$10
Variable Cost Per Unit
7
Contribution Margin Per Unit
$3
Fixed Costs
$15,000
Units Sold
5,000
Contribution Margin Ratio
– $3/$10 = 30%
• Sales to Breakeven = Fixed Cost/CM Ratio
• $15,000/30% = $50,000
• $50,000 - $35,000-$15,000 = $0
Breakeven Schedule
Breakeven Graph
What is Ratio Analysis
• Comparing different line items of the
Balance Sheet and Income Statement to
each other.
• For example, Current Ratio = Current
Assets/Current Liablilities
Ratio Analysis – Why Care
• Banks use Ratio Analysis in deciding to
extend Credit
• Ratio Analysis can serve as an Early
Warning System for your company
• It is useful to compare your Ratios to
Industry Standards
Ratio Analysis - Categories
•
•
•
•

Profitability – e.g. Return on Equity
Activity – e.g. A/R Turnover
Leverage – e.g. Debt to Equity
Liquidity – e.g. Current Ratio
Profit is an Opinion,but Cash or lack thereof, is Cold Hard Reality
Operating Cycle – Cash to Cash
Cash Flow Defined
• Beginning Cash Balance
• Add Money from:
– Cash Sales
– Collections of Receivables
– Proceeds from Loans
– Proceeds from Sales of Assets
– Owner’s/ Shareholder’s Contributions
Cash Flow Defined
• Less Money to:
– Cash Purchases
– Payments on Accounts Payable
– Loan /Credit Card Payments
– Draws/Distributions to Owners
• Ending Cash Balance
Sample Cash Flow Projection P1
Sample Cash Flow Projection P2
Drains on Cash-Clients Not
Paying On Time
Drains on Cash
• Growing Too Fast
– Puts strain on company
– Increases in Fixed Costs
– Hiring Inexperienced Employees
– Increased Risk of Fraud
Drains on Cash-Employee Fraud
• Christine Sylvester
Windish RV - Colorado
•40 Year Old Billing Clerk
•Embezzled $951k
•Fraud Lasted Three Years
•Created a Shell Company
– Wrote duplicate checks
– Deposited into Shell Business Account
•Plead guilty to felony theft
•Sentenced to 5 years
Drains on Cash-Employee Fraud
• Desiree Herrera
Payless Hardware-California
• 36 Year Accounts Receivable Clerk
– Worked from 2002 to 2009
– Embezzled $1.43 Million
• Skimmed Receivables
– Handled bank deposits
– Laundered money
• Convicted on 58 Felony Counts
– 1 count of grand theft
– 3 counts of filing fraudulent tax returns
– Sentenced to 10 years
– Husband sentenced to 1 year for money
laundering
Solutions to Improve Cash Flow
• Have a Basic Understanding of Accounting
and Taxes
– If you want to play the game, you need
to know how to keep score
• Have Accurate and Up to Date Accounting
Information
– Use Cloud Accounting
– Don’t Manage Your Business out of Your
Checking Account
Solutions To Improve Cash Flow
•
•
•
•
•
•
•

Get Deposits Upfront
Be Careful in Incurring Fixed Costs
Don’t Pay Early Unless You Get a Discount
Credit Reports on Customers
Background Checks on Employees
Reconcile Your Bank Account
Don’t Spend Trust Funds – Payroll and
Sales Taxes
• Use Budgets
• Purchase Commercial Theft Insurance
Budgets
• Why Budget?
– Forces you to think strategically about
your business and goals
– Can help you anticipate problems
– Can help detect Fraud
– Sets Expectations for Employees
Profit is an Opinion,but Cash or lack thereof, is Cold Hard Reality
Never Run Out of Cash
Never Run Out of CashPhilip Campbell
If I Am Making So Much Money, How
Come I Don’t Have Any Cash?
•
•
•
•
•
•
•

Looking at Accrual Financial Statements
Collection Problem with A/R
Not All Cash Expenditures are Expenses
Embezzlement of Cash
Not Making Cash Flow Projections
A Large Proportion of Expenses are Fixed
Your Profit Margins are Shrinking
Resources
• Xero Online Accounting
– www.xero.com
• QuickBooks Online
– http://quickbooks.intuit.com/cms/online/
• Wave Accounting
– http://www.waveaccounting.com/freeaccounting-software/
• Bill.com
– http://www.bill.com/
Resources
• Peace of Mind Cash Flow Schedule
–http://www.neverrunoutofcash.com/peaceofminddownload.htm

• Cash Flow Seminar Slide Deck
• https://docs.google.com/file/d/0BxrfhMfSpqlbUFxQzFhNFEwQUU/edit?usp=sharing

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Profit is an Opinion,but Cash or lack thereof, is Cold Hard Reality

  • 1. Profit is an Opinion, but Cash or lack thereof is Cold Hard Reality Dennis L. Thompson, CPA, CFE 206-390-9432 www.dlthompsoncpa.com @dennislt
  • 2. Common Question By Owners • If I am making so much money, how come I don’t have any cash?
  • 3. Agenda • • • • • • Types of Accounting Breakeven Analysis & Ratio Analysis Operating Cycle – Cash to Cash Mechanics of Projecting Cash Flow Drains on Cash Solutions
  • 4. Underlying Themes • The Importance of a Basic Understanding of Accounting • Having Accurate Accounting Information is Critical • Being Able to use Your Accounting Information to Make Business Decisions
  • 5. What is Financial Accounting • Production of Financial Statements – Income Statement – Balance Sheet • Bookkeeping • Used for Tax Returns • Designed for External Audience – Bankers – Tax Collectors – Creditors and Investors • Backword Looking
  • 6. What Is Management Accounting • • • • • • • Analysis of Costs - Breakeven Projection of Cash Flows Budgets Ratio Analysis Designed for Internal Audience Forward Looking The Information comes from your Accounting System and Reports
  • 8. Financial Statements-Compass For Your Business • Think of Your Business as a Small Plane • Think of Your Accounting System as an Instrument Panel • Two Potential Problems – Your Accounting Info is Wrong – You Don’t Use Your Accounting Info
  • 9. Categories of Financial Statements •Income Statement – Where You Have Been •Balance Sheet – Where You Are Now •Cash Flow Projection & Budgets – Where You Are Going • Statement of Cash Flows • Do You Have a Viable Company
  • 10. Profit & Loss - Comparison
  • 11. Balance Sheet - Comparison
  • 12. Balance Sheet - Comparison
  • 13. Statement of Cash Flows Increase Increase Increase Decrease Decrease
  • 14. Analysis of Costs - Breakeven • Sales Price Per Unit or Service – How much Gross Income per product or service. • Variable Cost Per Unit or Service – What are the Directs Costs associated with the product or service • Fixed Costs (Overhead) – Costs that need to be paid whether you make a Sale or not, e.g. Rent, Insurance
  • 15. Breakeven - Example • • • • • • Sales Price Per Unit $10 Variable Cost Per Unit 7 Contribution Margin Per Unit $3 Fixed Costs $15,000 Units Sold 5,000 Contribution Margin Ratio – $3/$10 = 30% • Sales to Breakeven = Fixed Cost/CM Ratio • $15,000/30% = $50,000 • $50,000 - $35,000-$15,000 = $0
  • 18. What is Ratio Analysis • Comparing different line items of the Balance Sheet and Income Statement to each other. • For example, Current Ratio = Current Assets/Current Liablilities
  • 19. Ratio Analysis – Why Care • Banks use Ratio Analysis in deciding to extend Credit • Ratio Analysis can serve as an Early Warning System for your company • It is useful to compare your Ratios to Industry Standards
  • 20. Ratio Analysis - Categories • • • • Profitability – e.g. Return on Equity Activity – e.g. A/R Turnover Leverage – e.g. Debt to Equity Liquidity – e.g. Current Ratio
  • 22. Operating Cycle – Cash to Cash
  • 23. Cash Flow Defined • Beginning Cash Balance • Add Money from: – Cash Sales – Collections of Receivables – Proceeds from Loans – Proceeds from Sales of Assets – Owner’s/ Shareholder’s Contributions
  • 24. Cash Flow Defined • Less Money to: – Cash Purchases – Payments on Accounts Payable – Loan /Credit Card Payments – Draws/Distributions to Owners • Ending Cash Balance
  • 25. Sample Cash Flow Projection P1
  • 26. Sample Cash Flow Projection P2
  • 27. Drains on Cash-Clients Not Paying On Time
  • 28. Drains on Cash • Growing Too Fast – Puts strain on company – Increases in Fixed Costs – Hiring Inexperienced Employees – Increased Risk of Fraud
  • 29. Drains on Cash-Employee Fraud • Christine Sylvester
  • 30. Windish RV - Colorado •40 Year Old Billing Clerk •Embezzled $951k •Fraud Lasted Three Years •Created a Shell Company – Wrote duplicate checks – Deposited into Shell Business Account •Plead guilty to felony theft •Sentenced to 5 years
  • 31. Drains on Cash-Employee Fraud • Desiree Herrera
  • 32. Payless Hardware-California • 36 Year Accounts Receivable Clerk – Worked from 2002 to 2009 – Embezzled $1.43 Million • Skimmed Receivables – Handled bank deposits – Laundered money • Convicted on 58 Felony Counts – 1 count of grand theft – 3 counts of filing fraudulent tax returns – Sentenced to 10 years – Husband sentenced to 1 year for money laundering
  • 33. Solutions to Improve Cash Flow • Have a Basic Understanding of Accounting and Taxes – If you want to play the game, you need to know how to keep score • Have Accurate and Up to Date Accounting Information – Use Cloud Accounting – Don’t Manage Your Business out of Your Checking Account
  • 34. Solutions To Improve Cash Flow • • • • • • • Get Deposits Upfront Be Careful in Incurring Fixed Costs Don’t Pay Early Unless You Get a Discount Credit Reports on Customers Background Checks on Employees Reconcile Your Bank Account Don’t Spend Trust Funds – Payroll and Sales Taxes • Use Budgets • Purchase Commercial Theft Insurance
  • 35. Budgets • Why Budget? – Forces you to think strategically about your business and goals – Can help you anticipate problems – Can help detect Fraud – Sets Expectations for Employees
  • 37. Never Run Out of Cash
  • 38. Never Run Out of CashPhilip Campbell
  • 39. If I Am Making So Much Money, How Come I Don’t Have Any Cash? • • • • • • • Looking at Accrual Financial Statements Collection Problem with A/R Not All Cash Expenditures are Expenses Embezzlement of Cash Not Making Cash Flow Projections A Large Proportion of Expenses are Fixed Your Profit Margins are Shrinking
  • 40. Resources • Xero Online Accounting – www.xero.com • QuickBooks Online – http://quickbooks.intuit.com/cms/online/ • Wave Accounting – http://www.waveaccounting.com/freeaccounting-software/ • Bill.com – http://www.bill.com/
  • 41. Resources • Peace of Mind Cash Flow Schedule –http://www.neverrunoutofcash.com/peaceofminddownload.htm • Cash Flow Seminar Slide Deck • https://docs.google.com/file/d/0BxrfhMfSpqlbUFxQzFhNFEwQUU/edit?usp=sharing