Why Your P&L Shows a Profit, But Your Bank Balance Doesn’t Add Up
You may see a net profit of $95,000 on your Profit & Loss (P&L) statement, but when you look at your bank account, there’s a decrease of $1,500. So, what’s going on? Here’s why this can happen:
Draws – If you're taking money out of your business for personal use (draws), it won’t show up as an expense on your P&L. This means your P&L may look healthy, but your bank account is getting smaller because you’ve pulled money out for yourself.
Liabilities (Debts) - Payments toward loans, credit lines, or other liabilities don’t show as expenses on the P&L. However, those payments still reduce your cash reserves. Even though you’re profitable, paying off debts can lower your available cash.
Accounts Receivable (A/R) Aging – Your P&L recognizes income when you make a sale, but if customers haven’t paid their bills yet, that money isn’t in your bank account. If payments are delayed, you could still have a positive P&L, but your cash flow is tight.
Here’s where the Cash Flow Statement becomes crucial!
The Cash Flow Statement gives you the REAL picture of your cash situation. It tracks the movement of cash in and out of your business, so you can see exactly where your money is going. Unlike the P&L, which focuses on profit, the Cash Flow Statement shows:
Operating Cash Flow (money generated or used by the day-to-day business)
Investing Cash Flow (money spent or earned from assets)
Financing Cash Flow (loans, investments, or owner draws)
By reviewing your Cash Flow Statement, you’ll be able to:
See where cash is being used (e.g., debt payments or draws)
Understand the timing of cash inflows and outflows (e.g., when your customers actually pay)
Plan ahead for any potential cash shortages
Know how many months of cash reserves you have in the bank
In short, the Cash Flow Statement is your business’s lifeline! While the P&L shows your profit, the Cash Flow Statement tells you if you have enough cash to cover your expenses and keep things running smoothly.