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In The Black With No Cash On Hand - How Does That Happen?

In The Black With No Cash On Hand - How Does That Happen?

It is a strange fact of doing business that a company can be profitable and still have no cash to spend. How does this happen? It can be attributable to a number of different things, with the most common being as simple as the difference between when revenues are recorded and when cash is received, or when expenses are recorded and when cash actually leaves the company.

When a company uses the accrual method of accounting, revenues are recorded in the month that a sale is made. This means that a $50,000 sale made in January is recorded in January, and the service or goods are likely provided at that time. However, if the company has a thirty-day payment policy, that means that the $50,000 will not be received from the customer until February. January revenues will show as $50,000, and the company may spend $20,000 on supplies or other expenses yielding a $30,000 profit, but the cash from the sale will not be in the bank until sometime the following month.

Likewise, a business can record profits based on sales but may spend more than it sold during that year in order to improve its environment and equipment for the following year, or to prepay expenses such as insurance or additional inventory. This will also result in a lack of cash on hand, despite the fact that the company shows a profit.

Please contact Salt Lake City CPA Ken Riter with any cash flow or small business accounting questions.

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Keith Vincent

Keith Vincent

Ken Riter is a Certified Public Accountant based in Holladay, Utah. He is a graduate of the University of Utah and brings broad financial and tax preparation experience to bear for each of his clients. With strong computer systems experience, Ken has empowered many business clients to gain better control of their finances by utilizing the power of the computer. His years of tax planning and tax preparation experience give his clients a distinct advantage in their tax needs. Starting in Salt Lake City, our company history is built on a tradition of service, technical expertise, and innovative thinking to meet the needs of a rapidly changing world.

RITER & COMPANY, CPA
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