Understanding Cash vs. Profit

You check your bank account and see a healthy balance. Business must be great, right? Not necessarily. Or maybe your bank account is nearly empty, but your profit and loss statement shows you’re making money. What’s going on?

This disconnect between cash and profit confuses countless business owners, and understanding the difference could mean the difference between thriving and becoming another statistic.

Your bank balance is just a snapshot of one moment in time. Profit, on the other hand, measures whether your business is viable by comparing what you’ve earned against what it cost you to earn it, regardless of when money actually changes hands.

Here’s a simple example. In January, you invoice a client $10,000 for completed work and pay $2,000 in expenses. Your profit is $8,000. But if that client hasn’t paid yet, and you only collected $3,000 from a different old invoice, your bank account only increased by $1,000.

You were profitable by $8,000, but your cash only grew by $1,000. That’s the disconnect.

Just A Few Reasons Your Bank Balance is Deceiving

1. Timing Differences: You record revenue when you earn it, not when you get paid. Invoice a client with 30-day terms? You show profit now, but won’t see cash for a month while you still have bills to pay today.

2. Loan Payments: Only the interest shows as an expense on your P&L, but the full payment (principal + interest) comes out of your bank. A $1,500 payment might only show $300 in expenses, but your bank account drops by the full amount.

3. Owner Draws: Money you take out as an owner doesn’t show as an expense. Your business can be profitable while your bank balance shrinks from regular draws.

You need both numbers because they tell you different things:

• Profit tells you: Is your business model viable? Are you pricing correctly? Can you sustain long-term?

• Cash tells you: Can you pay bills this month? Are customers paying on time?

Seven Action Steps

-  Run both reports monthly - Review your P&L alongside your cash flow statement

- Forecast your cash - Project when money comes in and goes out over the next 90 days

- Monitor receivables - Set up a collections process and follow it consistently

- Build reserves - Aim for one to three months of operating expenses in the bank

- Know your conversion cycle - How long from spending money until collecting from customers?

- Set smart payment terms - Balance winning customers with sustaining your cash flow

- Time large purchases - Don’t make major outlays right before slow seasons

The Bottom Line

Your bank balance and profitability measure different things. A healthy business needs both positive profit (proving your model works) and positive cash flow (proving you can sustain operations).

Too many business owners panic when cash is low despite being profitable, or spend freely when cash is high despite losing money. The businesses that thrive understand both metrics and manage accordingly.

Need help understanding your business’s cash flow vs. profitability? At Just Bookkeeping, we help business owners see the complete financial picture. Our monthly bookkeeping services include both profit and loss statements and cash flow analysis, giving you the clarity you need to grow sustainably. Contact us to learn how we can help you understand your numbers.