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Why Is My Bank Balance Different Than My Profit?

Updated: Mar 12, 2023

Many business owners struggle with accounting. As a business owner, there’s a lot to

Bank Balance
Why am I making profit but have no cash in my bank?

consider, whether it be your sales, profits, expenses, and net income. We often get asked by our clients why they are making a profit but have no cash in the bank? Where is all my cash going, I made money, where is it?

This is a common question. After all, it’s really easy to complete a big job, invoice for a large amount, and start spending. In your mind, you’ve earned that money, and you want to spend it. While it may seem easy to start spending money you’ve worked for, you need to take a step back and understand how revenue, profit, and net income work.

Money invoiced isn’t money in the bank. It will arrive one day, but it isn’t there yet and certainly won't be in entirety; there are many things to consider and we are going to cover them in this article.

Sales, Profits, and Free Cash Flow

The profit shown at the bottom of your Income Statement, or Profit and Loss Statement will never match your bank account. It’s really important for business owners to understand the difference between cash and profits. Even a healthy and profitable business can struggle if they have a profit but have no cash to show for it.

Here’s a simplified way of looking at it.

Let’s say you completed a big project and invoiced them for $5,000. That $5,000 invoice you just sent is a “Sale” for your business. It’s immediately recorded on your profit and loss statement by your accountant. However, that doesn’t mean the cash is accessible right away. You will receive that cash based on the payment terms you have agreed to with your client. Maybe that client pays you on a NET 30 days agreement, meaning you have to wait 30 business days to receive payment. So the bank still show 0$ for that invoice.

SALE: A sale is any transaction that involves you selling a product or service to a customer. It applies to both product and service-based businesses. It doesn't mean you have the money right away.

At this point, that sale is recorded and labeled as “Accounts Receivable.” It’s money you’ve made, but you don’t have it yet.

ACCOUNTS RECEIVABLE: Your accounts receivable refers to any money owed to a company by a debtor.

Now, your business keeps going on. You will receive that money in the future. Still, you need to account for expenses as well. Every month, you have to pay for things like:

  • Rent

  • Utilities

  • Cell phone plans and Internet

  • Meals and entertainment

  • Insurance

  • Cost of goods sold (COGS)

  • Wages

Production line
While you are waiting for your clients to pay you, your production line still goes on and you incur expenses.

Let’s look back at that original $5,000 invoice.

Say your business needs to pay $1,500 for rent, $200 for utilities, $200 for your cell phone and Internet, and $100 for meals and entertainment. These costs are often referred to as “Operating Expenses”, or indirect costs.

If that invoice were your only income for the month, you’d have to subtract your $2,000 in expenses from your $5,000 in revenue, resulting in a $3,000 “balance/bottom line on the Profit and Loss Statement”. But your bank account still shows 0$! Because your client hasn't paid you yet.

While you may have $3,000 in balance after your expenses and cost of goods sold, you still need to account for other type of expenses like interest expenses, depreciation; for liabilities like sales and income taxes; and for equity like owner’s drawings, which all reduce your bank balance! Some of these don’t appear on your profit and loss statement. Instead, they show on your balance sheet because they are liabilities/equity, not expenses.

So, by the time you put money aside to cover these additional items, your original $5,000 is even lower.

By the time you get paid by your client in 30 days, with new expenses already generated, the total of money left from that original invoice is reduced. When that cash is deposited and accessible, it’s then called “Free Cash Flow”.

It’s important that you understand what sales, expenses, gross profit, net profit, and free cash flow are, so you’ll never wonder where all your cash is going. Many business owners fail to understand cash vs profits, that sales are far from what they will receive in “Net Income”.

Business Is a Flow of Events and Transactions

Your business is always running, and transactions are taking place every day. That small coffee you buy each morning and for which you scan the receipt, counts as an expense for your business.

As a business owner, you need an accountant to help you make sense of these things. Simply recording a sale doesn’t mean you have the money yet. You have to wait for your client to pay the invoice, while managing all the daily and monthly expenses your business has. So, by the time you get paid, the actual cash you have in your bank will look very different than your original sales, and than the Profit and Loss Statement totals.

It’s All in the Numbers

You work hard to run your business, and it’s important that you understand the financial side of your business. Still, it can be difficult to understand the relationship between things like revenue, profit, expenses, and net income. That’s why you need an online accounting service to help you claim everything you can for your business. The Canada Revenue Service is strict, and you don’t want to make simple accounting mistakes that a professional can help you avoid.

Onyxia Accounting is run by a certified QuickBooks ProAdvisor who specializes in helping small and medium businesses with their accounting and bookkeeping needs. The most successful businesses are those that know how to get the most out of the accounting process.

Online bookkeeping services

If you have doubts about yours books and numbers, or would like to make sure everything is done properly and feel less stressed about it, contact Onyxia Accounting today. We work hard to help you get the right numbers, and make sense out of your cash flow.

Nadine LeBrun

President & Founder

Onyxia, Comptabilite | Accounting



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