The profit and loss report says you made money this quarter. The bank account says otherwise. You are delaying a supplier payment, wondering how to cover payroll, and looking at a net profit figure that seems to belong to some other business.

This is one of the most common conversations I have with small business owners, and it rarely means anything is wrong with the business itself. It usually means profit and cash are two different measurements, and nobody has shown you where the difference is hiding.

Profit and cash are not the same number

Your profit and loss statement follows the accrual idea, even for many businesses that think they use cash basis. Revenue is recorded when you invoice, and expenses are recorded when you incur them. Cash only moves when money actually leaves or enters the bank.

Several things sit between those two points. A sale you invoiced but have not collected is profit with no cash. Stock you bought for next month's orders is cash spent with no expense yet. A new machine reduces your bank balance but shows up on the P&L only slowly, through depreciation. A loan repayment reduces cash, and only the interest portion touches profit.

So a business can report a healthy profit and still be short of cash. It happens most often in growing businesses, because growth itself consumes cash.

A worked example: Marlow Print & Signage

Take a fictional sign and print shop, Marlow Print & Signage. Over one quarter, its P&L shows a net profit of 42,000. The bank balance, meanwhile, fell by 18,000. Here is what happened in between.

  • Net profit per the P&L: +42,000
  • Depreciation, a non-cash expense added back: +6,000
  • Accounts receivable grew by 26,000 (customers were invoiced but had not paid): -26,000
  • Inventory of vinyl and substrates grew by 10,000: -10,000
  • Accounts payable grew by 4,000 (suppliers were paid later): +4,000
  • Cash from operations: 16,000
  • A new wide-format printer, paid in cash: -22,000
  • Loan principal repaid: -7,000
  • Owner draws: -5,000
  • Net change in cash: -18,000

The business did not lose money. It earned 42,000 and then parked most of it in unpaid invoices, shelves of material, a printer and a loan balance. Every one of those is a legitimate decision. But none of them appear on the P&L as an expense, which is why the report and the bank account tell such different stories.

The usual reasons a profitable business runs short of cash

Customers are slow to pay

Receivables are the biggest culprit I see. A shop invoicing on 30-day terms that actually collects in 60 days is effectively financing its customers for free. The P&L looks fine. The bank account does not.

Watch the age of your receivables, not just the total. A balance sitting past 90 days is a warning sign, and some of it may never be collected at all.

Cash is tied up in stock or work in progress

Inventory purchases are not expenses until the goods are sold. If you buy ahead of a busy season, or a slow-moving item sits for six months, that cash is gone from the bank but invisible on the P&L. Service businesses have a version of this too, in unbilled work: hours delivered but not yet invoiced.

Assets and loan repayments do not hit the P&L the way they hit the bank

A 22,000 equipment purchase is spread over its useful life through depreciation. A loan repayment is mostly principal, which is not an expense at all. Both drain cash quickly and reduce profit slowly, if at all.

Owner draws, and taxes you are holding for someone else

Owner draws reduce cash but never appear as an expense, since they are a distribution of equity. Sole traders and LLC owners in particular often take draws without connecting them to the cash position.

Then there are taxes collected on behalf of a government. Sales tax in the US, GST/HST in Canada, VAT in the UK and Europe, and GST in Australia are collected from customers but are not your income. The cash sits in your account looking like a healthy balance until the filing date. Rules and due dates vary by country, so check with your local tax authority, but the bookkeeping principle is the same everywhere. That money belongs to a liability account, not to your working cash. The same goes for payroll taxes withheld from employees.

How to find where your cash went

You do not need a spreadsheet exercise to answer this. Your accounting software can do most of the work.

Start with the statement of cash flows. In QuickBooks Online and in Xero, this report starts from net profit and then walks through each balance sheet movement, which is exactly the walk we did for Marlow above. Run it for the same period as your P&L and read the lines that are large and negative.

Next, run an aged receivables report (QuickBooks calls it Accounts Receivable Aging, Xero calls it Aged Receivables). Look at what is over 60 and 90 days, and who owes it. Then look at your balance sheet movements month over month: inventory, prepaid expenses, loan balances and fixed assets. A big jump in any of them is usually part of the answer.

Finally, look at owner draws and tax liability accounts. Check whether the money in your bank account is partly spoken for by a tax return that is coming due.

When the books themselves are part of the problem

Sometimes the report is confusing because the bookkeeping is off. I regularly find things like these:

  • Bank accounts that have not been reconciled for months, so the book balance does not match reality.
  • Payments received but sitting in Undeposited Funds, never matched to the invoices they settled. The invoices then look unpaid, and receivables look larger than they are.
  • Personal expenses paid from the business account and coded to office costs or meals, which distorts both profit and cash.
  • Loan payments recorded fully as expense, or equipment purchases recorded as repairs.
  • Duplicate transactions from bank feeds that were never properly reviewed.

If any of that is happening, your profit figure itself may be wrong, and no cash analysis will make sense until the books are cleaned up. A profit number is only as reliable as the reconciliations behind it.

What to do with this

Treat cash as its own report. Look at the statement of cash flows and the receivables aging every month, next to the P&L, and set a firm routine for chasing invoices past their terms. If cash is tight while profit is healthy, the fix is usually in collection, purchasing habits or the timing of large payments, not in selling more.

If your P&L and your bank account keep telling different stories and you cannot tell why, I can review your books, reconcile the accounts and show you exactly where the cash is going. You can get in touch here and we will start with what your reports are showing today.