Recently we sat down with a prospect to discuss her current financial support needs, what she felt she needed and how our services may be a fit for her. During the conversation she told us multiple times that she LOVES her accountant and trusts him implicitly. However, while we were wrapping up our conversation, she mentioned she manages her business based on her bank account balance, which she looks at 4 to 5 times PER WEEK.

Being in this business as long as I have, this sent red flags flying for me. If a business owner loves his or her accountant, has a healthy business and still looks at the bank account 4 – 5 times per week there is something wrong with the relationship. What we have realized is business owners and accountants speak two different languages.

Business owners speak cash, but accountants speak net income (or profit). And here in lies the problem.

Cash and net income aren’t the same.  Sometimes they move together like synchronized swimmers, other times, they move in polar opposite directions.  The difference is all a matter of time.  When cash comes in and when profits are earned are not always the same. In addition, every business spends cash on items that don’t reduce net income.  Confused?  You are in good company.

There is a secret, well not so secret, path to understanding the language barrier between you and your accountant or the difference in cash and net income. Your Balance Sheet.

You know that financial statement that your accountant shows you from time to time that you don’t understand, and never look at.  In your Balance Sheet all mysteries of cash can be uncovered.

The balance sheet presents the balances (or amounts) of a company’s assets (or possessions), liabilities (or debts), and owners’ equity (or owner value) at a point in time.

Let’s go back and say that you just met with your accountant, who told you that you made $250,000 as of October 31, 2019. You look at your bank account and there is $50,000 in it.  Let’s walk through how you find where the cash went.

Start by printing your balance sheet as of January 1, 2019. Next, print your balance sheet as of October 31, 2019. Lay them side by side.  As you go down the two balance sheets and compare them line by line, the difference in the accounts as of January 1 and October 31 tell you exactly where your cash went.

Here is an example:


Account 1/1/19 10/31/19 difference
Cash $20,000 $50,000 $30,000
Accounts receivable $175,000 $125,000 $50,000
Accounts payable $80,000 $45,000 $35,000
Bank line of credit $110,000 0 $110,000
Owner distributions $0 $75,000 $75000


Now that you have your numbers, let’s walk through the cash movements and reconcile them to your net income.

Account Change Positive or negative
Accounts receivable $50,000 +50,000
Accounts payable $35,000 -$35,000
Bank line of credit $110,000 -$110,000
Owner distributions $75,000 -$75,000
Net -$170,000


Now let’s write the narrative of this story.  The business made $250,000.  You have $50,000 in the bank.  You began the year with $20,000.  Therefore $30,000 of your net income is sitting in your bank account.

You did a better job of getting advance deposits from your customers and collecting your accounts receivable timely, so you reduced accounts receivable by $50,000.  YEA!  That is $50,000 of new cash, that was reported in your net income in the prior year.  That is a positive cash item, that didn’t create net income this year.

For accounts payable and bank line of credit, both liabilities were reduced. You love that!  It feels great to have less debt this year.  But paying debt consumes cash.  Paying debt is not an expense.  That sounds odd, since you must pay it back, but remember this, when you took the loan you didn’t report that cash inflow as income.  If it wasn’t income coming in, it wasn’t expense going out.

Lastly, you used $75,000 of cash for owner distributions.  You may have those funds in your personal account or maybe you used them for family expenses.  Either way, the cash went out of the company and into your personal account. In other words, the business distributed cash to you.

The difference in your net income and cash is $200,000.  The changes on your balance sheet, excluding cash, reflect at net $170,000 reduction in cash.  The remaining $30,000 difference is reflected as an increase in your cash this year.

Over the years we’ve worked with hundreds of business owners.  As a result of our experience we’ve crafted tools to help owners manage their cash in ways that work for them.  If you are tired of being confused or struggling to manage your cash flow, the team at MACKEY is here to help.