Demarest: The Truth About Profit, Cash, and Why They Don’t Match

A joke I often tell is this: when a client looks at their financials and sees that they’re making money, they throw them in the trash because what else can they learn? They’ve got it all figured out. When another shop owner looks at their financials and sees a loss, they throw those same financials in the trash because there’s no way they can be right. We did more work than ever—there’s no way we didn’t make any money!

What’s really being highlighted here is the difference between perception and reality. The core issue with people not understanding their financials is this: when perception doesn’t match reality, where do you go from there?

To explain this further, let’s stick with that hyperbole. The reason the successful shop owner didn’t bother looking at the financials is because his perception was his reality. He knows he’s killing it, and the financials just confirmed it—what more could they tell him? And while there’s always more to glean from financials, when what you feel matches what you see, the bridge between the two is fairly clear and easy to understand.

The other shop owner throws his financials in the trash for the opposite reason. His perception doesn’t match his reality. How can he work so hard and have no money? To go even deeper, most people connect profit with cash, and this is where the real disconnect begins. If you make $20,000 in profit, you expect to have an additional $20,000 in cash. When you don’t—when you actually have less cash—things get very confusing, very quickly.

There are a number of reasons you don’t have the cash you think you should at the end of the month or year—honestly, the list is nearly endless. However, there are some common areas I see shops fall into time and time again. Hopefully, these can help fix some current issues or help you avoid them in the future.

Failure to Control Accounts Receivable/Customer Deposits

This issue shows up in different ways depending on how your business operates. For larger companies dealing with a lot of fleet accounts, this is often the no. 1 issue affecting day-to-day cash flow.

Here’s why: when you sell a job, you post the sale and create a receivable—the customer owes you money. If you have a $30,000 job with $15,000 in profit, you recognize that profit whether the customer pays you or not. So, you look at your financials and say, I made what? How can I have made $15,000 in profit and not see it in my bank account?

This is exactly why. You’re arguing two different things: did you make the money, or do you have the cash? There will always be a timing issue with larger fleet accounts, but if left unchecked, you could end up paying tax on money you’ll never receive.

You might be thinking, “Well, I don’t do fleet accounts, so this doesn’t affect me.” Not all receivables are long-term payables. Some of this could be money you thought you already received. If you’re not monitoring your credit card processing or don’t notice a deposit that bounced, you’re still paying tax on that sale unless you catch it.

Is all the cash you’re taking from customers actually making it to the bank? If it isn’t, then yes—you made it—but I’ll agree, I don’t know where it is either. Control your receivables. Control your cash.

Buying Inventory and/or Equipment

All of your business expenses show up on your profit and loss statement, but there are several areas where you can spend cash without it immediately impacting your P&L.
Inventory is one of the biggest sources of confusion. You deduct cost of goods sold, not cost of goods purchased. So, when you look at your financials and see that you made $10,000 but don’t see the cash, it might be sitting in the $10,000 worth of tire inventory you just bought. You made the profit—but instead of having it in cash, you’re holding it in hard assets.

Most of this works itself out with timing, but if inventory gets out of control, the disconnect between cash and profit can become very real.

Equipment and vehicles follow a similar pattern. The good news is that, in many cases, we can depreciate the full amount and get a deduction. The bad news is that you won’t see those expenses on your P&L statement right away. That record month with no cash remaining? It might be the loaner car you bought with cash or the tire machine you picked up from the Snap-on dealer.

Debt Costs Cash

If you don’t recognize loan proceeds as income—because they’re not sales—why would you expect a deduction when you pay that loan back?

When you look at your financials, the bottom line is the money available to service debt. If you have no debt, it should all end up in your pocket. But if you have sizable monthly payments, you can easily watch all of your profits disappear into debt service, leaving you with no cash for anything else.

If you have $5,000 in monthly loan payments, should you expect cash left over? Maybe you would’ve said yes in the past—but now you know that leaves you with zero. This is a major mindset shift for many people. If you’re carrying a lot of debt and chasing a break-even number, are you actually ever going to break even?

Are You the Problem?

You might be your own worst enemy—and one of the biggest contributors to the disconnect between your business’s profit and its cash.

Some of this is by design and is actually a great problem to have. Other times, it’s the direct cause of the cash crunch your shop is feeling. Remember, distributions are allowed in most business structures (everything except C-Corps). But if left unchecked, they can quietly drain your cash.

Your business made $200,000, but you took out $250,000 in distributions—why are you surprised that there are no reserves? This is often what’s behind statements like, “I didn’t make that much money.” Most of the time, people don’t realize how much they’ve already taken out or spent personally.

Good tax strategies often involve distributions, but when they’re not monitored, they can be the source of a lot of cash confusion—or outright shortages.

Final Thoughts

At the most basic level of financial statements, there’s no difference between profit and cash. If your lemonade stand makes $100 in profit, you have $100 in cash—there are no other variables.

But once you add customer deposits, credit terms, inventory, equipment purchases, lines of credit, and profit distributions, it’s easy to see how confusion starts. While I may not have found your missing cash, I hope I’ve given you enough clues to start looking for it yourself.