I Made a Profit… So Where Did All the Money Go?

If you've ever looked at your Profit & Loss, seen a healthy profit and then looked at your bank account thinking, “Where on earth did all that money go?” — you're definitely not alone!

It's one of the most common questions I hear from small business owners, and the answer comes down to understanding the difference between profit and cash flow.

So, let's keep it simple and take a look at why you can make a profit on paper but still feel like there's not much money in the bank.

“But I made a profit… so where has all the money gone?”

You look at your Profit & Loss and think:

“Hang on… it says I made $30,000 profit. So why don't I have $30,000 sitting in my bank account?”

It's a really good question.

And the answer is that profit isn't the same as cash in the bank.

Your Profit & Loss shows the financial performance of your business over a particular period. Your bank account shows the actual cash you have available at that moment.

There can be a pretty big difference between the two.

Here's an example.

Let's say your business has made $100,000 in sales and, after accounting for your expenses, your Profit & Loss shows a $30,000 profit.

It sounds great.

But then you look at your bank account and think:

“Where is my $30,000?”

There are a number of reasons it may not be there.

Your customers haven't paid you yet

You might have completed the work, invoiced your customers and recorded the income, but you're still waiting for them to pay.

You've made the sale — but you don't have the cash yet.

You've purchased assets

Perhaps you've bought a new work vehicle, equipment or other business assets.

The money has definitely left your bank account, but depending on the purchase and its accounting treatment, the full amount may not appear as an expense on your Profit & Loss straight away.

You've paid off a loan

Loan repayments can also reduce your bank balance.

However, the principal portion of a loan repayment generally reduces the amount you owe rather than being treated as a normal business expense. Interest is treated separately.

So money can leave your bank account without the entire repayment reducing your profit.

You've taken money out of the business

If you've taken money out of the business for personal use, your bank balance will obviously be lower.

But that doesn't necessarily mean the money was a business expense.

Money can be tied up elsewhere

Your business money isn't always sitting neatly in your bank account.

It can be tied up in:

• Outstanding customer invoices

• Stock or materials

• Equipment

• Vehicles

• Deposits

• Prepaid expenses

So when you look at your bank balance, you're only seeing one part of the picture.

So, where did the money go?

The important thing to remember is that profit and cash flow are measuring different things.

Your Profit & Loss helps you understand whether your business is profitable.

Your cash flow helps you understand whether you have enough actual cash available to meet your commitments.

That's why you can have a profitable business and still feel like there isn't enough money in the bank.

The real question isn't just “How much profit did I make?”

It's:

“Where is my money, and what is it committed to?”

That's where keeping your bookkeeping up to date can make such a difference.

When you understand your numbers, you can see what's coming in, what's going out, who owes you money and what commitments are coming up — instead of simply wondering where the money disappeared to.

Your bank balance is only part of the story.

— Jen, Alpha Bookkeeping