Your report says you made money last month. Then you check the bank account, and it’s lower than it was a month ago. Both can be true, and it usually doesn’t mean anybody made a mistake.
Profit and your bank balance answer two different questions. Profit is what the business earned after its costs. The balance is what’s sitting in the account today. When the two don’t line up, these are the four places I look first:
1. Customers who haven’t paid you yet.
If your books count a sale when the invoice goes out, that sale is in your profit the day you send it. The money shows up whenever the customer pays. So a strong month of invoicing can feel like a slow month at the bank. (I cover that part in the profit and loss post.)
2. Loan payments.
Only the interest on a loan is an expense. The rest of each payment pays down what you owe, so it leaves your account without touching your profit. A truck payment is a good example. Most of that money is gone from the bank, and your profit hardly moved.
3. Money you took out for yourself.
In a single-member LLC, what you pay yourself is an owner draw. It’s your money and you’re free to take it. A draw doesn’t count as a business expense though, so your profit stays the same while the account goes down. If you took out more than usual last month, that might be your whole answer.
4. A credit card you paid down.
What you put on the business card counts as an expense in the month you charge it. The cash leaves later, when you pay the card. So a month where you pay off a big balance takes more cash than that month’s report shows.
All four are normal. They’re about timing and where the money went, and good books show each one clearly.
One tip if you’re on QuickBooks. There’s a report named Statement of Cash Flows. It shows the cash that came in and went out for the month, which is the piece a profit and loss leaves out.
When I close a month for a client, the report I send covers what the business earned and where the money went, in plain English.
If you’d like to know how your own books are doing first, the free Books Health Quiz is a good place to start.
Take the free Books Health QuizKeep reading: How to Read Your Profit and Loss Statement