Have you ever looked at your Profit & Loss report and thought:
“If my business made that much profit, where is all the money?”
It’s a question we hear regularly from business owners. Your accounts might show that you’ve made a healthy profit, but when you look at the bank account, there seems to be considerably less cash sitting there.
That doesn’t necessarily mean anything is wrong. The simple explanation is that profit and cash are not the same thing.
Your Profit & Loss measures the financial performance of your business. Your bank balance simply shows how much cash you have at one particular moment — without telling you what you’re owed, what you owe, or where money has gone.
Some of Your Profit May Still Be Owed to You
One of the first places to look is your unpaid customer invoices.
Depending on how your accounts are prepared, income can be included in your Profit & Loss when you invoice a customer, even though they haven’t actually paid you yet.
For example, you might have made $100,000 in sales for the month, but if $25,000 of those invoices remain unpaid, you won’t have received all of that money into your bank account.
This is where your Aged Receivables report becomes useful. It shows who owes you money, how much they owe and how long invoices have been outstanding.
A business can therefore be profitable on paper while struggling for cash simply because customers are taking too long to pay.
Some of the Cash in Your Bank Is Already Spoken For
It works the other way too.
Your bank balance might look healthy, but that doesn’t mean all of the money is available to spend.
Your Aged Payables report shows bills you’ve received from suppliers that haven’t yet been paid. If you have $50,000 in the bank but $20,000 of supplier bills due over the next few weeks, your true available cash position looks quite different.
The same applies to GST, PAYG withholding and superannuation.
Your business may collect GST as part of customer payments, but that GST may later need to be paid to the ATO. PAYG withheld from employee wages also needs to be passed on to the ATO, while employee super needs to be paid to their super funds.
That money can temporarily form part of your bank balance, but it isn’t necessarily yours to spend.
This is why simply checking the bank account can sometimes give business owners a false sense of how much cash they actually have available.
Some Cash Outgoings Don’t Reduce Your Profit
There are also payments that reduce your bank balance without having the same effect on your Profit & Loss.
Loan repayments are a common example. If you make a $2,000 loan repayment, the full $2,000 comes out of the bank, but only the interest component will generally be an expense. The remainder reduces the loan balance.
The same issue can arise when you purchase a business asset. You might spend $30,000 on equipment or a vehicle, meaning $30,000 has disappeared from your bank account, but that doesn’t necessarily translate to a $30,000 expense in your Profit & Loss at that time.
And Then There Are Owner Drawings
Money taken out of the business for personal use is another major reason profit doesn’t equal cash.
For a sole trader or partnership, withdrawing money from the business generally doesn’t create an expense. It is simply a drawing — you’re taking some of the business’s cash for yourself.
Say your business makes a $100,000 profit during the year and you withdraw $60,000 to cover your mortgage, groceries and other personal expenses. Those withdrawals reduce the amount sitting in the business bank account, but they don’t reduce the $100,000 profit.
For a company, however, it works differently. The company’s money belongs to the company, and simply transferring money to yourself isn’t the same as properly paying yourself a wage or declaring a dividend.
If you’re taking money from your company for personal use, it needs to be properly accounted for. Depending on the circumstances, this might be through salary or wages, dividends, reimbursement of legitimate business expenses, or a properly documented loan. Simply withdrawing money throughout the year and treating it as “drawings” doesn’t make it tax-free.
This is why company owners should make sure there is a clear plan for how they are paying themselves, rather than regularly transferring money out of the business and worrying about how to account for it later.
Looking Beyond the Bank Balance
This is why good bookkeeping is about much more than getting the bank account reconciled.
To understand how your business is really going, you need to look at the bigger picture: your Profit & Loss, what’s owed to you, what you owe to others, upcoming tax and super obligations, loans, and money being taken out of the business.
Together, these tell you far more than the bank balance ever could.
The Bottom Line
A profitable business can have very little money in the bank. Equally, a business with plenty of cash sitting in its account may have large bills and tax obligations just around the corner.
Understanding the difference between profit and cash flow makes it much easier to work out where your money is going and how much is genuinely available to spend.
If you’ve ever looked at your accounts and wondered “we made a profit, so where did all the money go?”, good bookkeeping can help you find the answer. Get in touch with our team if you’d like a clearer picture of your business finances.
