Every business owner I have ever worked with has asked me this question in one form or another. It most often comes up around tax time, because you get your tax bill which leaves you wondering, “Hey I made all of this money. I now have to pay taxes on it. So where the $%#( is it all?

It usually starts with an air of, “hey I think you %#&)*ed up my books!”

I’ve learned how to handle this really well by now, because I’ve seen it so much.

The first place to go when you’ve made a profit, but don’t know where your money went is the Balance Sheet.

The very basis of the question and conversation confirms that the money “should” be there according to the profit and loss statement.

One way or another your answer is in the Balance Sheet, and can also be found by examining the Statement of Cash Flows.

The Statement of Cash Flows analyzes fluctuations in account balances on the balance sheet.

So it’s important for all business owners to have a basic understanding of how to read all three financial statements. This will help whenever you find yourself asking this question.

The first place I check is owner / shareholder distributions. This usually answers the question. It means that the business owner simply took the money out.

Distributions are not an expense, so they are not reflected in the Net Income figure from the income statement.

I once had a client insist that there was no way he took “that much money out.”

So I ran the balance sheet and double clicked his distributions. This revealed the list of payments that were made to him, including a single check for $75,000.

When he saw that $75,000 payment he exclaimed, “that’s right I forgot I had to pay that guy back!”

What if Distributions doesn’t answer the question?

When it isn’t the owner sucking the business dry (kidding a little), there are a few other “usual suspects” to check.

  • Accounts Receivable
  • Inventory
  • Pre-paids
  • Reduction in liabilities

Accounts Receivable
Run your balance sheet by month. See if the trend is an increasing one. This would indicate that you’re not collecting all of that money you’re making. Problem solved! Go collect, and then try to keep that money in the business.

Inventory
Same exercise – run your balance sheet year to date totaled by month. If the inventory balance is an increasing trend, then you’re locking too much money up in inventory. Figure out what is on the shelves that isn’t selling, because bottom line you are buying more inventory than you’re selling, and that is tying up cash.

Pre-paids
Again, same exercise. You might be tying up too much money in prepaids (like prepaid inventory).

If it isn’t any the above, it could be that you are paying your payables too fast, OR you have a lot of debt on your books. Principal reduction is not an expense. Only the interest is. If you are paying down a lot of loans, that could be where your cash is going. See about consolidating debt.

Reduction in liabilities
When you pay off debt, like a big credit card balance or a loan, this is cash leaving your bank account that isn’t included in net income. This could account for where your profits went, especially if the above doesn’t prove to account for it. It means you made the money, and you collected it. It means you did not tie cash up in assets like inventory or fixed assets. This means that you used it to get rid of debt and save money on interest.

Some resources to help you

Hire us to go through your books with you – Click Here → One to One Training.

Check out CashFlowTool.com. This will help you get a handle on your cash flow, and it lays it out in very simple, easy to follow terms. You don’t need to be an accountant to use this. In fact it was built for the business owner, but many accountants are using it for their clients.

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