Profit vs cash: why your P&L and your bank disagree

The most common question we hear from owners of growing businesses is some version of: "My P&L says I made money last quarter, so where is it?" The answer is not that one report is wrong. Profit and cash measure two different things, on two different clocks, and the gap between them is what decides whether you make payroll on the 15th.

Two clocks

Profit counts the invoice. Cash counts the payment.

On an accrual P&L, revenue is recorded when you earn it - when the work is delivered and the invoice goes out. The customer may pay in 30, 45 or 90 days. The P&L does not care. Your bank account cares about nothing else.

The same is true in reverse for costs. A laptop bought outright hits cash today and the P&L over three years. Annual software paid in January is a cash event in January and an expense every month. Loan repayments are not an expense at all, only the interest is - yet the whole payment leaves the account.

Where the money actually goes

When a profitable business feels broke, the cash is almost always sitting in one of five places. Check them in this order:

1. 1Unpaid invoices. Receivables are profit that has not become cash yet. Sort them by age, not by customer. Anything past 30 days is where your payroll went.
2. 2Inventory or prepaid work. Money spent on things you have not sold or billed yet.
3. 3Debt principal. Repaying what you borrowed never shows on the P&L, but it leaves every month.
4. 4Taxes not yet paid. Estimated tax, sales tax collected from customers, payroll tax withheld from staff. It is in your account, and it is not yours.
5. 5Owner draws. Money you took out. Fair, but invisible on the P&L.

Reading it

The three numbers to look at together

You do not need a finance degree. You need three figures side by side, refreshed every week:

• Cash today, across every bank account, minus money that is already spoken for (taxes collected, payroll due this week).
• Receivables by age: how much is owed to you, and how much of it is past due.
• Commitments in the next 30 days: payroll, rent, loan payments, subscriptions, tax deposits.

Cash today plus the receivables you can realistically collect this month, minus the commitments, is your working number. When it goes negative, you find out three weeks before the bank does.

What to do about the gap

• Invoice on delivery, not at month end. Every day an invoice waits to be sent is a day added to the payment clock.
• Shorten terms for new customers and offer a small discount for paying within seven days on large invoices; the discount is cheaper than a credit line.
• Move the taxes you collect or withhold into a separate account the day they come in, so the operating balance is honest.
• Time big purchases against collections, not against the P&L. A profitable month is not the same as a month you can afford a laptop.
• Read the three numbers every Monday. Ten minutes, same time, same order.