Understanding the Mystery: Where Did Your Business Profit Go?

Have you ever looked at your profit and loss statement, seen a healthy profit, then checked your bank account only to find much less than expected? This financial disconnect leaves many business owners scratching their heads and asking: “Where did my profit go?” Let’s demystify this common business conundrum.

The Fundamental Difference: Profit and Cashflow (Cash)

Profit and cash are two entirely different financial concepts that often get confused. Your business can be profitable on paper while having limited funds in the bank. This discrepancy occurs because:

• Profit is what remains after subtracting expenses from revenue on your financial statements
• Cash is the actual money available in your business bank account

Understanding this distinction is crucial for maintaining healthy business finances and avoiding unexpected cash flow problems.

Common Reasons Your Bank Balance Doesn’t Match Your Profit

Personal Transactions (aka Drawings)

Personal financial movements significantly impact your business bank balance without affecting your profit figures:

• Regular transfers to your personal account for living expenses
• One-off large withdrawals for personal purchases (like a new car or house deposit)
• Personal tax payments made from the company account
• Personal funds deposited into the business account (increases cash but isn’t counted as income)

Business Timing Differences

Several legitimate business activities create timing gaps between profit recognition and cash movement:

• Accounts Receivable: Sales recorded as income but not yet paid by customers
• Accounts Payable: Expenses recorded in your profit and loss that haven’t been paid yet
• Asset Purchases: Major equipment or property purchases reduce your bank balance but are depreciated over time in your profit calculations
• Tax Payments: Business GST and income tax payments reduce your bank balance but don’t impact profit calculations

Useful Reports for Tracking Cashflow vs. Profit in Xero

Xero offers several helpful reports to understand the relationship between your profit and cash:

• Cash Summary Report: Shows only transactions flowing through your bank account, though it may incorrectly categorize some non-expense items as deductible expenses
• Profit and Loss Account (Cash Basis): Provides a view of your profit based solely on completed cash transactions
• Short Term Cashflow Report: Forecasts your bank balance based on when bills are due and when you expect customer payments
• Business Snapshot: Offers useful financial insights in an easy-to-understand format

Learn more: Is Xero Right for My Business?

How to Better Track Your Business Money

To maintain a clearer understanding of where your money is going:

1. Regularly reconcile your accounts
2. Keep personal and business expenses strictly separated
3. Monitor accounts receivable and follow up on late payments
4. Create a cash flow forecast alongside your profit projections
5. Consider timing of major purchases and tax payments when planning

Getting Professional Help with your Cashflow

Understanding the relationship between profit and cash is vital for business success, but it can be complex. Working with a professional accountant who specializes in small business finances can provide clarity and help you make better financial decisions.

Professional accountants can:

• Analyze your specific profit-to-cash discrepancies
• Create customized reports that show your true financial position
• Help you develop strategies for improving both profit and cash flow
• Ensure you’re prepared for tax obligations without cash flow surprises

Why This Cashflow and Profit Matter for Your Business

The disconnect between profit and cash is one of the most common reasons otherwise successful businesses fail. A business showing consistent profits can still face cash flow crises that force closure. By understanding where your profit goes, you can make informed decisions about:

• When to invest in growth
• How much to withdraw for personal use
• When to focus on collecting outstanding invoices
• How to time large payments to maintain adequate cash reserves

Understanding the relationship between your profit and cash position isn’t just accounting theory—it’s essential business knowledge that protects your company’s future and helps you build sustainable success.

Need Help Navigating Your Business Finances?

Professional accounting support can transform how you understand and manage your profit and cashflows. With the right guidance, you can make sense of your numbers and ensure your bank balance aligns better with your profit expectations. Remember, seeing a profit on paper is just the first step to building a financially healthy business. Understanding where that profit goes and how to convert it to available cash is the key to long-term business success.

If you have cashflow concerns or need help forecasting. please get in touch. Business Like NZ has been providing professional tax and business advice to the Auckland region and beyond for years!