Tim McDermott “Accounting Myth #101”

Accounting myth #101:  I am in good shape because my Income Statement is positive

Being in radio for almost 40 years, I have often heard “Content is King.”  As a former Program Director, I wholeheartedly believe that.   As a General Manager I also heard “Distribution is King” and as a former General Manager I understand that, too.   If you have great content but a weak signal, then your impact is small.  If you have great distribution, and content that’s not interesting, then your impact is also small.

Let’s apply this radio understanding to your understanding financial statements.  In my time of mentoring other General Managers and CEOs, I have discovered this is one area where a lot of radio station leaders struggle.   Yet, understanding your financial statements is a very important responsibility as a leader.  You don’t have to know how like-kind transactions are handled in accounting but you should have a good idea of the overall financial health of your organization.

There is one key area in this short article that’s important to understand.  The Income Statement is only part of the picture of your financial health.  (If you are a non-profit, they call it the Statement of Activity.)  You might be a person who just looks at this statement’s “bottom-line” – the Net Income (Loss).   If it is positive, then you are in good shape, right?  Well, not nessacarily.  It’s like saying “Content is King” without considering distribution.  In order to get a more complete picture of where you stand, you need to also look at cash items that don’t impact the income statement.  If you have borrowed money and are paying it back, then the cash payback won’t be in the income statement.  It’s very possible if you have borrowed money for a tower or a building or a station and are paying it back, your overall net income may be positive, but your cash flow, even the payments were bigger than the income for the same month could be negative.  This means you wouldn’t be in great financial shape.

Right now, a lot of non-profits took the PPP Loan from the SBA.  That transaction, although it has brought you a lot of cash isn’t income and won’t initially be on the income statement. It shows up in the Balance Sheet (non-profits: Statement of Financial Position).   It will only be considered income when you meet the requirements and the loan is forgiven.   So in this case you could have a lot of cash and yet your income statement wouldn’t be impacted.  You may ask why isn’t my net income higher?  I got all this cash.  Because cash is not always income in the accounting world.  On the more positive side, there are also other items such as depreciation and amortization which are noncash items but could lower your income.  Some bookkeepers book them annually and others monthly.

What does this mean?

It means to get a more complete picture of your financial position, you need to always look at a second financial report along with your Income Statement.  It’s called the Statement of Cash Flows. If you aren’t looking at this report monthly, start this month.  Accounting software reports generate this report and it will tell you how much cash was on hand at the beginning of the month and at the end of the month.  It takes into all the items I have mentioned above and will give you a better picture of where you are.  In radio terms, this is like the “Distribution is King” report because it tells you how and from where your cash was distributed.  Personally, I like to go one step further and have the cash on hand at the end of the month allocated into funds so the board can designate it.  This is a powerful way to manage your cash.  If you would like to know more about that, let me know.  The newest accounting guidance for financial reporting includes board designated which lets users know that even though an organization has a large cash balance, the ministry has purposes for it.  Why is that important?  Because if you are sitting on $500,000 you are saving for a project and a listener asks why you are raising money at Sharathon, you can transparently tell them why.

Takeaway: 

• Look at Income Statement and Statement of Cash Flows together to get a better picture of your financial health.
• Consider creating funds for your Cash Balance at Month-End for greater Cash Management. This could be done on a separate spreadsheet. 

Tim McDermott is a CPA and has 40 years experience in broadcasting.  His website is timmcdermottconsulting.com and he can be reached at tim@timmcdermottconsulting.com.