Why Isn’t My Profit The Same As My Bank Balance?

Profit and Loss Statement

My clients ask me this question all the time! As small business owners we are passionate about our products or services and love the idea of being our own boss. However, one aspect of running a business that many of us dread is dealing with financials.

There are a few reasons why your ‘profit’ is never the same as your bank balance. Whether you’re building an empire, hustling from home or starting a side gig, you need to understand your financials. Understanding your financials gives you confidence and helps you to make informed business decisions. And, at the end of the day, understanding the numbers lets you know if all your effort is paying off!

One of the most important financial reports is the Profit and Loss (also known as an Income Statement). A Profit & Loss reports your income and expenses over a period of time. It helps you to figure out things such as, are you charging enough, selling enough, or spending too much. It reports all income (incoming funds) less all your expenses (outgoing funds).

Or as my friend Laura likes to say, it shows ‘What you Earn’ less ‘What you Burn.’

If you record your income less all your expenses, at the very bottom you have a number representing your profit or (loss), known as your net income or net profit. This is often referred to as the ‘bottom line.’ It is literally the last number on the bottom line of the Profit and Loss statement. It’s at this point where you may be saying to yourself “but that’s nothing like my bank balance!” Ever wondered why that is?

Balance Sheet

Here’s a sample of things that you won’t find on your Profit & Loss because they sit on your Balance Sheet. The Balance Sheet lists the assets, liabilities, and equity of the business. Unlike a Profit and Loss that looks at performance over time, a Balance Sheet looks at the health of a business at a given point in time, for example at the end of a quarter.

  • Assets belong to the business and include things like bank accounts, office equipment, motor vehicles, accounts receivables (sales where the money hasn’t actually been paid), buildings, goodwill, and inventory.
  • Liabilities include debts, loans, credit cards, accounts payable, and payroll liabilities (PTO, sick time, etc.).
  • Equity, in its simplest form, represents the difference.  Basically, if you were to use all your assets to clear all your debts and obligations, what’s left over is the equity in the business.

Larger purchases, like office equipment and computers, are considered assets to the business that will assist with producing future income; therefore, these do not appear on your Profit and Loss as an expense.

Another example is sales invoices that you have created but have not yet received the actual payment (money in your bank). This will show as income, but also as accounts to be received (accounts receivable) on your Balance Sheet. And the reverse is true for any bills you may have on your books – these will show as an expense AND sit in your accounts payable.

Loans and debts (for example a credit card) are recorded as liabilities and represent future obligations to pay. If you make a repayment on your credit card, it’s not recorded as an expense,  it’s recorded as a reduction of that liability.

Also any owner draws, director loans or trust distributions don’t show on your profit and loss because they reflect changes in equity and are not actually a business expense.

That’s a few reasons why your ‘profit’ is never the same as your bank balance. Essentially, it’s because your Profit and Loss does not capture all movements of money in and out of your bank account.

Financial Management

Managing your financials is an essential part of running a small business, but it can also be a challenging and daunting task. If you lack expertise, have time constraints or a fear of making mistakes, seek help when needed to ensure the success and longevity of your business.

And if you’re still not clear, connect with me to help you get clear on your decisions, challenges or opportunities by scheduling a complimentary Business Success Strategy Session with me.