Your Small Business Is Making Money… So Why Is There No Money in the Bank?

You had a great month.

You brought in more revenue than you expected. Your customers are paying their invoices.

You look at your Profit & Loss statement and see a healthy profit.

So why does your bank account seem to disagree?

If you've ever looked at your business bank account and thought, "Where did all the money go?", you're not alone.

One of the most important things I want small business owners to understand is this:

Profit does not equal cash in the bank.

Profit and cash flow are two different things

Your Profit & Loss statement tells you how much revenue your business earned and how much it spent during a particular period.

Your bank account tells you how much cash you actually have available right now.

Those numbers can be very different.

For example, imagine you own a contracting business.

You complete a $20,000 job in June and invoice your customer. Your accounting records may show that $20,000 as revenue (actual cash in your pocket).

But your customer doesn't pay you until August.

Meanwhile, you've already paid your employees, purchased materials, paid your insurance, and covered your other business expenses.

Your business may show a profit in June, but you may not have the cash to pay your bills in June.

So where does the money go?

There are several reasons a profitable business can have limited cash.

Accounts receivable: You've earned the money, but your customers haven't paid you yet.

Loan payments: Loan principal reduces the amount of cash in your bank account, but it isn't recorded as an expense on your Profit & Loss statement.

Equipment purchases: Buying a $10,000 piece of equipment can significantly reduce your bank balance without showing up as a $10,000 expense on your P&L.

Owner draws: You may be taking money out of the business for personal use. That's not a business expense, but it absolutely affects your cash.

Inventory or other assets: Cash can be tied up in things your business owns rather than sitting in your checking account.

This is why your financial statements matter

Your bank balance only tells you what is in the bank.

It doesn't tell you whether your business is actually profitable.

Your Profit & Loss tells you about profitability.

Your Balance Sheet gives you a bigger picture of what your business owns, what it owes, and what is left over.

When those reports are kept accurately and reviewed together, you can start answering much more important questions:

• Am I actually making money?

• Where is my cash going?

• Are my customers paying me quickly enough?

• Can I afford to hire someone?

• Can I afford that new piece of equipment?

• Do I have enough cash to get through a slow month?

• Is my business financially healthy?

Those are much more valuable questions than simply asking, "How much is in my bank account?"

Don't wait until tax time to find out how your business is doing

One of the biggest mistakes I see small business owners make is treating bookkeeping as something that only matters when tax season rolls around.

Your books are much more than a way to give your tax preparer numbers.

Your books are the financial story of your business.

When they're current and accurate, you can use that information to make decisions throughout the year, not months after the fact.

Need help making sense of your numbers?

That's exactly where a good bookkeeper can help.

At Functional Business Solutions, I don't just want to categorize transactions and send you a report that gets filed away.

I want your financial statements to help you understand what's happening in your business.

If you're making money but constantly wondering where the cash went, it may be time to take a closer look at your books.

Let's get your numbers working for you instead of leaving you guessing.