Not All Profit is Cash to Cover Payroll
- Jewell Salazar
- Jan 12
- 3 min read
Employees expect payroll to be funded and deposited on time—without exception. Meeting that obligation requires sufficient cash on hand. While this sounds straightforward, it is often complicated by GAAP’s accrual accounting framework.
Under Generally Accepted Accounting Principles, revenue and expenses are recognized when earned or incurred—not when cash is received or paid. In other words, reported profit reflects economic activity, not liquidity. For mortgage lenders, this distinction matters deeply because many income and expense items are non-cash in nature, creating a meaningful disconnect between profitability and available cash.
The most common sources of confusion are Mortgage Servicing Rights (MSRs), Interest Rate Lock Commitments (IRLCs), and mark-to-market accounting on Loans Held for Sale (LHFS).
When servicing rights are retained, GAAP requires lenders to recognize the fair value of MSRs as income at the time of sale. This recognition increases reported earnings immediately, even though the underlying servicing cash flows may not be realized for months or years. Profit improves—but cash does not.
Similarly, gains embedded in IRLCs may be recognized well before a loan closes—or even if it never closes. Once a loan is classified as held for sale, anticipated gains are recorded despite the fact that cash from the sale may not arrive for weeks. Together, these accounting treatments can materially overstate near-term liquidity relative to reported earnings.
Payroll, however, is paid with cash—not accounting income. A lender can report strong net income and still face liquidity pressure if earnings are tied up in non-cash items or redeployed to fund new production. This is why experienced operators look beyond the income statement and rely on the statement of cash flows to assess true operating liquidity.
Bottom line: profit is an accounting measure, not a cash measure. For mortgage lenders, understanding the difference is essential to managing payroll, funding operations, and maintaining financial stability. Disciplined use of the statement of cash flows—especially one tailored to IMB activity—is critical to seeing what the P&L alone cannot.
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Dr. Schell is CEO, Managing Partner, and Co-Founder of Mortgage Banking Solutions and the Founder of MBS Financial Services ("MBS"), based in Austin, Texas. Dr. Schell is known for his ability to turn "vision into reality" and "chaos into order" as he finds creative solutions to the challenges his clients face addressing Revenue Stability, Technology Enhancement, Financial Management, and Workflow Efficiency.
He has 4 decades of experience as a strategist directing the activity of both small and large groups of employees including mortgage lending activity at Bank of America. His leadership knowledge extends from his hands-on experience and his academic training in his MBA, his master's degree in leadership, and his doctoral work to examine employee dynamics given leader stimulus
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