Your Bank Balance Is Not Your Profit

You log into your bank account and see $30,000 sitting there.

Great. Your business made $30,000, right?

Nope.

Your checking account is not a profit and loss statement. I will happily die on this hill.

Want to know what your business is actually making instead of guessing from the bank balance? Schedule a consultation with Dunham Bookkeeping Services. Your financial reports should be able to answer that question.

Cash and profit are measuring two different things

Your bank balance tells you how much cash is sitting in your account at a particular moment.

Profit tells you how much your business earned after its expenses.

Those numbers interact with each other, but they are absolutely not interchangeable.

You could have a very healthy bank balance while having a terrible month. You could also run a profitable business and have less cash than you expected.

Not every deposit is income

Say you borrow $20,000 for the business.

Your checking account just increased by $20,000. Congratulations on your suddenly impressive bank balance.

Your profit increased by exactly $0.

Loan proceeds aren't income. You borrowed the money and now you owe it back.

The same problem comes up with owner contributions. Putting your own money into the business increases cash, but your business didn't earn that money.

Customer deposits and sales tax collections can also put cash in the account that isn't yours to treat as profit.

Not every withdrawal is an expense

This works in the other direction too.

Take an owner draw. Cash leaves the bank account, but an owner draw isn't a business expense.

Pay down the principal on a loan and cash leaves again. The principal portion isn't an expense on your profit and loss statement.

Buy a major piece of equipment and the accounting treatment may spread that cost over time rather than showing the entire purchase as an expense immediately.

Your bank account notices every dollar moving in and out. Your profit and loss statement cares about what those dollars actually represent.

And your bank balance already had money in it

This one seems obvious once you say it out loud, but it causes a surprising amount of confusion.

You probably didn't start the month with $0.

A $40,000 bank balance at the end of September might include $25,000 that was already sitting there on September 1.

That doesn't mean September generated $40,000 of profit.

It means you have $40,000 of cash.

Those are very different statements.

So what should you actually look at?

Start with your profit and loss statement.

It should show your income, expenses, and net profit for the period you're reviewing. Compare this month to last month. Look at year-to-date numbers. Pay attention to expenses that are growing faster than revenue.

Then look at your balance sheet and cash flow alongside it.

Together, those reports give you a much better picture of what your business is doing than repeatedly refreshing the bank app and hoping the number looks comforting.

And those reports only help when the bookkeeping behind them is accurate.

Cash still matters

None of this means you should ignore your bank balance.

Cash matters quite a bit. A profitable business can still run into serious trouble when it doesn't have enough cash available to pay bills.

The point is that cash answers one question and profit answers another.

“How much money do I have available right now?” is a cash question.

“How much money did my business actually make?” is a profit question.

Please stop asking your checking account to do both jobs. It has enough responsibilities already.

Need financial reports you can actually use to understand your business? Schedule a consultation with Dunham Bookkeeping Services.