Don't Run Your Business by Your Bank Balance
Ever wonder why you feel like you didn’t make any money but your CPA says you owe taxes? Or why your bank account doesn't seem to match your profit and loss statement? You're not alone.
One of the biggest misconceptions among business owners is that the money in the bank equals profit. It doesn't. Understanding the difference between your cash balance and your business's actual profit can help you make better decisions, avoid cash flow surprises, and plan for taxes with confidence.
Taxes are calculated on profit, which can be significantly different than your cash balance. Your bank account tells you how much cash you have. Your income statement tells you how much money you've made. Those are related—but they're not the same thing.
A few items that affect cash vs. profit:
Things that LOWER cash but don't lower profit
If you’ve used your business account as a personal piggy bank spending wildly on Amazon and drive thrus for lunch, those aren’t business expenses- but they’ve whittled away at your cash. So, you may have a very different profit number (and taxes due), but no funds to pay them with!
If you make loan payments, only the interest portion of the payment is an expense. So a $500 loan payment may only be a 60.00 interest expense even though the payment was more. (the other part is reducing that loan balance)
You bought equipment. If this will be useful for several years, this is usually expensed a little each year through depreciation. So, you may spend $10,000 but only get a deduction of $1,500 this year- the other $7,500 of expenses will come later.
Things that INCREASE cash but aren't income
You put money into the business.
Loan proceeds that haven’t been spent yet.
Did a customer pay your in advance for a job you haven’t finished yet?
Things that sit in your account but aren't yours
If you pay payroll or sales tax, that’s not your money to spend- even though it’s sitting in your account.
Checks in the mail or did you write a check that didn’t clear yet? Bam- your bank statement is a little too flush!
✔ Bottom Line
Cash isn’t profit. This is why keeping good accounting records year-round is so important! Your bank balance tells you where you are today. Your financial statements tell you where you're headed. You need both if you want to make good business decisions. You wouldn’t try to drive blindfolded, so why would you run a business with no map?
This article is provided for general educational purposes only and is not intended as tax, accounting, legal, or financial advice. Laws and individual circumstances vary, so please consult a qualified professional regarding your specific situation.