One of the most common concerns I hear from business owners is that their reports are showing a profit, but they don’t have any money in the bank.
For example: “My report is showing a profit of $50,000, but I only have $10,000 in the bank. What is going on?”
Here are three possible explanations why you’re making a profit but have no cash.
You’ve paid down liabilities
One explanation is your cash has been used to pay off a liability.
A liability could be one of the following.
- Sales tax owing (like GST)
- A vehicle loan, business loan, or COVID loan
- Credit card debt
Cash payments towards any of these liabilities will not appear on a Profit & Loss report (also called an Income Statement). These payments are not expenses. They are payments that reduce the liabilities in your company.
If you pay late, interest and penalties will show up on your Profit & Loss report as expenses. But the actual payment to reduce the liability will not.
So, if your profit is $50,000 and you only have $10,000 in the bank, you might have paid down the liabilities in your company by about $40,000. Paying down liabilities improves your balance sheet and can increase the value of your company.
You’ve purchased assets
When you purchase things like vehicles, computers, and furniture – those things don’t show as expenses on your Profit and Loss report, so they don’t reduce your profit. Instead, they are counted as assets.
For example, you might have spent $40,000 on new equipment. But it doesn’t show as an expense on your Profit and Loss report.
So where does it show up? First, you’ll find the equipment under assets on your Balance Sheet contributing to the value of your company.
Next, that equipment will lose value over time. That loss of value counts as an expense called “amortization.” So, only 20% of the cost of the equipment – $8,000 – will show up as an expense the first year you buy it.
So, even though you have a $40,000 outflow of cash, only $8,000 is showing up as an expense. That could account for a high profit and low cash balance.
There is a shareholder loan
A third possibility is you have one or more shareholders/owners in your company with a shareholder loan. A shareholder loan is commonly used for shareholders that spend company money on personal expenses or take cash draws.
These transactions do not show up on the Profit and Loss report because they are not expenses, so it is important to keep an eye on your balance sheet during the year. It is possible that the “missing cash” from your bank balance can be attributed to shareholder draws or shareholder spending.
