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  • Writer's pictureCherie Larson

Profit vs. Cash in the Bank

When your accountant did your taxes, were you confused because your net income was good, but your cash balances were low?

You already know the payments you get from your customers increase your cash balance, and the expenses you pay decrease the cash balance. The net is profit, and many assume that this should match their cash in the bank.

During this time especially, small business owners are discovering that this isn’t the case.

As you face financial challenges during this global crisis or work to pay the taxes you owe, it can become evident that the cash just isn’t there. So, where did it all go?!

What is often forgotten are the things paid out of the bank account that don’t touch the profit and loss statement.

Here are some of the most common items that can drain your cash:

  • Payroll Taxes withheld from an employee to be paid later to the Federal and State governments.

  • Loan Payments - the interest goes on the P&L (profit and loss statement or income statement), but the reduction in the amount owed (principal) does not affect P&L and uses cash.

  • Inventory Purchases - if you don’t expense items as you buy them but put them into an inventory account, you need to count the purchases as a cash-flow item.

  • Credit Card Charges are entered as an expense but are usually paid monthly. It’s easy to forget that payment still has to come out of the bank.

  • Owner Draws - it is so easy to pull cash out of the business when you need it without creating a plan for what to take out when.

  • Inventory, Equipment, Autos and Property Purchases - every company is different, but purchases of items over a certain amount are not expensed on the P&L but put on the books as an asset. This can be a significant draw on cash.

If you’re looking for a better way to use your cash and make sure you have the money when you need it, reach out to us to schedule a time to talk. We have helped other entrepreneurs like you make a difference in their cash flow – and their peace of mind.


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