Profitable, so where is the money?
A line-by-line bridge from the profit in your accounts to what actually happened in the bank.
Take these from one period — a year or a quarter — and use the same period throughout. Leave anything that does not apply blank.
An estimate from the figures you enter. Not accounting advice, and not a statutory cash flow statement. Nothing leaves your browser.
Profit is an opinion, cash is a fact
It is one of the more disorienting experiences in running a business. The accounts say you made money. The bank says otherwise. The instinct is that somebody has made a mistake — the bookkeeper, the accountant, the software — and almost always nobody has. Profit and cash are answers to different questions, and the distance between them is made of perfectly ordinary things.
Some of them are the cost of growing. Revenue you have booked and not collected is profit that exists only as a promise. Stock is cash you have converted into things on a shelf, and it stays converted until somebody buys them. Both of these get larger as the business gets larger, which is the uncomfortable part: the healthier the growth, the more of it you are funding personally.
The rest are worse, because they never appear on a profit and loss account at all. Capital spending leaves the bank today and arrives in the accounts slowly, over years, as depreciation. Debt principal is not a cost — only interest is — so a business repaying a loan sees nothing in its profit figure to explain where the money went. And drawings are a distribution rather than an expense, which makes them the single easiest thing for an owner to lose track of, since taking more out does not make the profit number look any different.
Put those on one page with a total at the bottom and the mystery usually resolves in about thirty seconds. One line is nearly always much larger than the others, and that line is the thing to go and do something about. It is worth ten minutes a quarter, because the alternative is finding out next spring what happened last summer.
What this tool does not do
This is a management reconciliation, not a statutory cash flow statement, and it will not tie to one. It takes the figures you type without checking them against anything, so a wrong sign on a working-capital movement flows straight through to the answer. It covers the items that most often explain the gap for a small business rather than every possible item - an unusual business will have something here that this does not ask about.
- Producing a cash flow statement under any accounting standard, or anything you could file
- Checking your figures against your books, your bank, or each other
- New borrowing, share issues or money coming IN from financing - this explains where profit went, not where cash came from
- Foreign exchange movements, acquisitions, disposals or anything non-recurring
- Deferred tax, provisions, accruals or any judgement in the accounts themselves
- Telling you whether the drawings you are taking are reasonable - it can only show you how large they are against profit
Frequently asked questions
How can I be profitable and have no money?
Because profit measures what you earned and cash measures what moved, and several large, ordinary things sit between them. Revenue booked but not collected. Stock bought and not sold. Equipment paid for now and expensed over years. Debt principal, which is not a cost at all. Owner drawings, which are not a cost either. None of those reduces profit, and every one of them empties a bank account.
Which line is usually the culprit?
For a growing business, receivables and stock — the cost of funding your own expansion. For an established one it is more often the three that never touch the profit and loss account at all: capital spend, debt principal and drawings. A business can service a loan, buy a van, pay its owner well, report a healthy profit and be poorer every single month, with nothing on the P&L looking unusual.
Why is debt repayment not in my profit figure?
Only the interest is a cost. Repaying principal reduces a liability — it is a balance sheet movement, so it never appears on the profit and loss account. That is why a company servicing debt out of profit can look comfortable in the accounts while the bank balance falls steadily, and why the reconciliation matters more the more borrowing there is.
Are drawings really the problem people say they are?
Often, yes, precisely because they are not a cost. Drawings and dividends are a distribution, so they do not reduce profit and do not show up in any of the numbers most owners look at monthly. It is entirely possible to take out more than the business generates in cash for a year while every report says the business is doing well.
How often should I do this?
Every quarter, and it takes ten minutes once you know where the figures live. The value is not the final number — it is seeing which line is biggest, because that is the thing to go and change. Doing it once a year means finding out in March what went wrong in the previous June.