As an Accountant working with small businesses across the U.S., we often get this question from clients:
“My Profit & Loss says I made $100,000. But I only have $10,000 in the bank. Where is the profit?”
This concern is very real, and very common. If you’re running your business day-to-day based only on your bank balance, it can feel like your accounting reports are detached from reality. But the issue often lies in understanding the difference between net profit and cash flow, and how accrual-based accounting works.
Let’s walk through a recent real-world example, and how we helped one of our clients solve this exact problem.
The Client’s Dilemma
A small business owner contacted us at Outsourced Bookkeeping with serious concern:
- Their taxable income was reported at $100,000
- But their bank account balance was only $10,000
They asked:
“If I made this much profit, where is the money? I don’t even have enough money in bank to pay my taxes!”
Step 1: Understanding the Accounting Basis
We started by explaining the basis of accounting
Your accounting method matters, and once chosen, it must remain consistent year over year unless the IRS formally approves a change in method of accounting.
This client was using the accrual basis of accounting, which records:
- Revenue when earned, not when received
- Expenses when incurred, not when paid
This method gives a fuller picture of the business’s performance, but it doesn’t reflect actual cash movements. That’s where confusion starts.
Step 2: Analyzing the Gap with a Cash Flow Statement
To uncover why the profit wasn’t reflected in cash, we prepared a Cash Flow Statement, a tool many business owners overlook, but one that tells the real story of where your cash went.
Here’s what we found:
-
Accounts Receivable Had Grown
- A large chunk of income was still uncollected
- In other words, the client’s customers hadn’t paid yet
- This showed up as revenue, but no cash came in yet
-
Fixed Assets Were Purchased
- The client had invested in new equipment
- This reduced the bank balance, but didn’t reduce the net profit (it was capitalized)
-
Owner Withdrawals Were Significant
- The business owner had taken personal draws
- This doesn’t affect net profit, but it does reduce bank balance.
-
Inventory Had Doubled
- The business spent cash to build inventory levels
- That cash was converted to stock, not an expense, so profit stayed high, but cash dropped
These four factors combined to create a perfect storm, A Profitable Business On Paper, But A Strained Cash Position In Real Life.
Step 3: Our Strategic Advice
After this review, the client asked:
“What can I do to fix this?”
Our clear recommendation:
Start Monthly or Bi–weekly financial reviews with your accounting team.
At Outsourced Bookkeeping, we don’t just send reports. We help you interpret them, catch red flags early, and plan proactively.
During these reviews, we’ll:
- Track your cash burn and inflows
- Analyze receivables, inventory, and owner withdrawals
- Highlight cash drains before they become crises
- Help you take informed decisions on investments, hiring, and taxes
Final Thoughts
Profit doesn’t equal cash, and understanding that difference is crucial to managing a sustainable, healthy business.
With regular financial check-ins and a partner who understands both the numbers and the story behind them, you’ll never be left asking, “Where did the money go?” again.
Need help understanding your cash flow?
Let Outsourced Bookkeeping be your proactive accounting partner.
We specialize in Real Estate Accounting, Small Business Financials, And Back–Office Support For CPAs, and we’re here to help you take control of your numbers.
Sunil Khullar, Founder & President
Outsourced Bookkeeping
