Your Business Is Profitable—So Where Did All the Money Go?
Updated: Sep 9
Your P&L shows that the business made $20,000 last quarter. Your bank account has $2,000.
Where did the other $18,000 go? Nothing is necessarily wrong with either number.
Profit and cash are measuring different things. Understanding that difference is one of the more important parts of managing a business.
Why Profit and Cash Don’t Match
There are several reasons a profitable business may not have much cash in the bank.
1. Your Customers Haven't Paid You Yet
If you use accrual accounting, revenue can appear on your P&L when it is earned even though the customer hasn't paid the invoice yet. Suppose you complete a $25,000 project in June and give the customer 30 days to pay. Your accounting records may recognize the revenue in June. The cash may not arrive until July. That $25,000 is sitting in accounts receivable, not your checking account. This is why accounts receivable deserves attention. Revenue doesn't pay payroll until it turns into cash.
2. You Purchased Assets
Suppose you spend $30,000 on equipment. The cash leaves your account immediately.
But depending on the asset and applicable accounting and tax treatment, the entire $30,000 may not appear as an expense on your P&L at the same time. The cost may instead be capitalized and recognized over time through depreciation. Your bank balance takes the immediate hit even though your P&L may tell a different story.
3. You're Paying Down Debt
Loan payments are another common source of confusion. If you make a $2,000 loan payment, part may be interest and part principal. Interest is generally an expense on the P&L. Principal reduces the loan balance on your balance sheet. But the entire $2,000 leaves your bank account. That's another reason cash can decline even while the business remains profitable.
4. Owners Are Taking Money Out
Owner draws and distributions can also reduce cash without appearing as operating expenses on the P&L. The business may have generated a profit, but if a significant amount of cash was distributed to the owner, the bank balance will reflect it.
Look at the Cash Flow Statement
Your statement of cash flows helps connect these pieces. It generally separates cash movement into three categories:
Operating activities — cash generated and used through normal business operations.
Investing activities — purchases and sales of equipment, property, and other long-term assets.
Financing activities — borrowing, debt repayment, owner contributions, distributions, and other financing activity.
This helps answer a question the P&L can't answer by itself:
Where did the cash actually go?
Historical financial statements tell you what already happened. Managing cash also requires looking ahead.
What cash do you expect to collect over the next 30 days?
What payroll, rent, loan payments, taxes, vendor payments, and other obligations are coming due?
Are there large purchases coming up?
Are customers paying on time?
You don't need an elaborate financial model to start answering those questions. Even a basic cash flow forecast can help identify a shortage before it becomes an emergency. Being profitable is important. Knowing when the cash is actually coming in, and where it's going,
is what allows you to operate the business. We, at Arden Hill Partners, are here to help.
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