Cash went up but the month was in the red — why that happens

You open the drawer at the end of the month and there is more cash than last month. And yet, when you do the once-a-month subtraction, the month was in the red. Or the other way round: the numbers say something was left, and the wallet feels light. These 2 do not drift apart because you made a mistake in the arithmetic. They drift apart because the day the money moves and the day the business happens are different days.

In an earlier note I wrote about the once-a-month subtraction: take the money that came in, then subtract what you paid for the things you sell and everything else you paid. At the time I wrote that cash going up and being in the black are not the same thing, and moved on. This is the rest of it.

It is only that the 2 are measuring different things. Black or red measures what happened as business during that month. Cash up or down measures what passed in and out of the wallet during that month. They are 2 faces of the same trade. Neither one is the true one and the other a lie.

3 things pull them apart: selling on credit, lump-sum payments, and stock. Credit first. The day you sell and the day you are paid are different days. Delivering at the end of the month and being paid the month after is common even in a small trade. What you sold happened as business that month, so it goes on the black side. But the cash has not arrived. In a month when credit grows, you are in the black and the wallet gets lighter.

Let me put 1 set of numbers down. They are made up, only to show the shape. Say sales in a month are 10 and 4 of that was sold on credit. If what you paid for the things you sell is 5 and everything else is 3, the subtraction gives 2, so the month is in the black. But the cash that actually came in is 6 and the cash that went out is 8, so the wallet is 2 lighter. The same month is profitable and losing cash. That is the drift in the order of things.

The 2nd is lump-sum payments. Paying 6 months of rent at once, paying insurance once a year, buying a machine. The cash leaves in full in the month you pay, while what you get for it is used across the months ahead. So the month you paid looks heavy and the months after it look light. Unless you lay out a full year, you cannot tell which month was really the heavy one.

The 3rd is stock. Cash leaves on the day you buy, but while it sits on the shelf nothing has happened as business yet. Only on the day it sells do the sale and the money paid for that thing line up. Goods on the shelf are money that has changed shape. So in a month when you bought more stock, cash goes down, and that is not a loss: the money turned into goods. It becomes a real loss only if it never sells.

The drift runs the other way too: a month when cash went up and the month was in the red. Last month's credit all landed, you were paid up front, you borrowed. Each of those makes the wallet heavier without the month's trade having been good. Borrowed money is not sales, and money received up front is something you still owe in goods or in work. Relaxing in a heavy-wallet month shows up in the month after.

So there are 2 things to look at: the once-a-month subtraction, and the movement of the wallet. Watch only the subtraction and you keep booking profit on money that never arrives, then jam on a payment day. Watch only the wallet and you take every month that money landed for a good month. Either one on its own is not enough.

I misread this myself. There are a few things my company pays once a year, and I looked at one of those months and thought we had overspent. In fact that single payment covered 12 months. Spread evenly it was not a large amount, and I was trying to judge it from the figure in the month it was paid. The other way round, I have also treated a month when payments arrived in a batch as a month when things were going well.

In KAZENA Books, which we build, these 2 end up as separate tables. You put in receipts, invoices or a bank-statement CSV, AI reads them and proposes the account, the amount and the tax, and the user checks and approves. From the approved lines, a table of what happened as business in the month and a table of what you hold and what you owe right now are built automatically. The first is what is called the profit and loss statement, the second the balance sheet. Invoices are made in the same place and receivables and payables are managed there, so who still owes you how much is visible there too.

A word about tax. I am not a tax accountant or a lawyer, so confirm any decision about filing or payment with a professional. With that said, 1 thing worth knowing is that what gets looked at when you file is usually not the movement of cash but what happened as business. So if credit sales and stock are not written down anywhere, the story stops adding up later.

1 thing to do today. Take 1 sheet of paper and write down, as of today, the money that has not come in yet and the money you have not paid yet. Who owes what, and by when. That is all. It takes 15 minutes. Put that list next to what is in the wallet and you can see today where next month's version of you is going to get stuck.