By Mike Kimble, CPA, SSBC Consultant/Accountant

Have you ever looked at your profit and loss statement and wondered why your business showed a profit but your bank account did not?

This puzzling phenomenon is almost always due to items that flow through your balance sheet. The balance sheet is the place that keeps track of your assets, liabilities and equity. 

Assets are cash, inventory, furniture, equipment, and improvements. 

Liabilities include the amounts you owe, such as loan balances, credit card balances, payroll tax, sales tax and unredeemed gift certificates. 

Equity is the amount invested by the owner(s) and the profit or loss retained by the business. 

Other items that effect the profit and loss statement are non-cash items called booked expenses. Booked expenses usually are depreciation and amortization. These expenses are used to expense assets such as furniture, equipment and improvements over time. 

Cash flow runs through the balance sheet in various ways. There are several kinds of cash flow decreases. Every time you purchase assets with cash/check such as inventory (adding a new product line), furniture and equipment, the assets increase on the balance sheet and the cash/checking decreases by the same amount. Every time you make cash/check payments on liabilities such as loan principal balances and credit card balances, you decrease the liabilities and also decrease cash by the same amount. 

Cash flow increases also take various forms. For example, the sale of gift certificates will increase cash/checking balance and also increase the liability gift certificates not redeemed balance. Keep in mind that there may be additional items on the balance sheet, which could have an effect on cash flow.

It should be noted that gift certificate sales are not a current income or revenue item but a pre-sale of future income or revenue. Think of gift certificates as a savings account to draw on when the services are performed or the retail is sold and paid for with those gift certificates.

In order to get a true cash flow profit or loss you need to do a cash flow analysis which includes all items of cash inflows and outflows. This includes cash-item inflows and outflows from both the balance sheet and the profit and loss statement. This cash flow analysis is formulated on the cash basis of accounting, not the accrual basis. The accrual basis of accounting is a system of recording receivables as income and payables as expenses whether or not any cash has actually changed hands. The cash basis is a system of recording income when cash/checks/charges are collected and recording expenses when the check is written or cash is paid. The cash basis analysis does not include the booked expenses such as depreciation and amortization.

SSBC bases its budget guidelines on the cash basis analysis approach. It is a way of looking at your true cash flow profit and loss statement as a cash management statement. It allows the salon owner to get the real cash picture of the business. The SSBC budget guidelines are based on several years of analysis and are continually adjusted for current trends in the salon ♦