{"id":22664,"date":"2022-12-19T17:12:11","date_gmt":"2022-12-19T23:12:11","guid":{"rendered":"https:\/\/www.cfosimplified.com\/?p=22664"},"modified":"2022-12-19T17:36:16","modified_gmt":"2022-12-19T23:36:16","slug":"removing-confusion-from-your-financials","status":"publish","type":"post","link":"https:\/\/www.cfosimplified.com\/business\/removing-confusion-from-your-financials\/","title":{"rendered":"Removing Confusion From Your Financials"},"content":{"rendered":"<p>Often, I\u2019m told by a business owner that they don\u2019t understand why their financial statements show strong profitability for two or three months, and then \u2014 suddenly \u2014 they have a month with a significant loss. They have stable sales, but the highs and lows of profitability are confusing.<\/p>\n<p>You don\u2019t need to be a CPA to understand cash versus accrual basis reporting, and it\u2019s important for any business owner to understand the difference.<\/p>\n<ul>\n<li>Cash Basis shows how money has moved through your bank account.<\/li>\n<li>Accrual Basis shows the profitability of the sales that you\u2019ve made.<\/li>\n<\/ul>\n<p>Often business owners follow the way their accountant does their taxes. This can give them a misguided view of their profitability. If your CPA does your taxes on a cash basis, they want you to pay taxes on the money that you\u2019ve received. But your financial statements should show profits based on the sales you made.<\/p>\n<p>Here\u2019s a simple example:<br \/>\nIf your business had only one customer, and you sold them $10,000 this month with a cost of $6,000, you made a $4,000 profit \u2014 on an accrual basis. Your costs are aligned with the sale you made, easily identifying the profit on that sale.<\/p>\n<p>If you were reporting on a cash basis, your reports would show the movement of the money. So, in this same example, you sold $10,000 of product this month, but your customer paid you nothing. You paid your supplier $6,000 for what you bought. Your sales for this month were $0, because you received no money, but your expenses were $6,000. You had a $6,000 loss. Next month, your customer pays you for what they bought this month, but you pay no bills, because you paid your supplier this month. So, next month, you will receive $10,000, but pay no money out. Wow, you will make a $10,000 profit!<\/p>\n<p>Accrual reporting shows you the profitability on your actual sales. Cash reporting shows profitability based on the money you\u2019re received and paid out. Accrual reporting actually reports your profits from operations. Cash reporting reports how money has flowed through your bank account.<\/p>\n<p>If you\u2019re still confused, <a href=\"https:\/\/www.cfosimplified.com\/contact-us\/\">reach out to us<\/a>. It\u2019s important that you understand these differences.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Often, I\u2019m told by a business owner that they don\u2019t understand why their financial statements show strong profitability for two or three months, and then \u2014 suddenly \u2014 they have a month with a significant loss. They have stable sales, but the highs and lows of profitability are confusing. You don\u2019t need to be a [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":22665,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[1774,39],"tags":[2100,1940,2080,1939],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v22.5 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Removing Confusion From Your Financials - CFO Simplified<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.cfosimplified.com\/financial-statements\/removing-confusion-from-your-financials\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Removing Confusion From Your Financials - CFO Simplified\" \/>\n<meta property=\"og:description\" content=\"Often, I\u2019m told by a business owner that they don\u2019t understand why their financial statements show strong profitability for two or three months, and then \u2014 suddenly \u2014 they have a month with a significant loss. 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