Why is my monthly P&L report different from what I have in the bank?

We are following up to last week’s episode about your Profit & Loss Report by asking the question of why is your profit different from your bank balance each month? Which numbers are the ones you should be focusing on? Simply put, the answer is BOTH! Your profit and your cash flow play important roles in your business finances and you should look closely at both of them on a monthly basis and more. 

Let’s start comparing numbers!

What we’re talking about 

What’s A Profit & Loss Report? What Is Cash Flow? How Much Money Do I Really Have?

What’s a Profit & Loss Report?

A Profit & Loss report shows you...

How much money you’ve made  How much money you’ve spent on your cost of goods  How much you’ve spent on operating expenses How much money you’ve made in profit

There are three sections of a Profit & Loss Report. 

Income: This shows you your total income over a period of time which can be broken up by revenue stream. It’s helpful if you’re generating revenue through various income streams (like consulting, digital products, and physical products) so you can see how you’re making money. 

You can view your revenue on a macro level, which is the grand total, or you can view it on a micro-level, which includes the details of what income streams make up your total revenue. 

Cost of goods sold: Like the income section, this can also be broken down by different types of costs, such as raw materials and labor. 

Expenses: This shows you all of your operating expenses by expense category and the grand total. Often, your expense categories are the same as your tax deductions category, so this part of the report is helpful when filing your taxes. 

The final line of a Profit & Loss report is the net operating income or your profit. If this number is positive, then you’ve made more money than you’ve spent. If this number is negative, then you’ve spent more than you’ve earned. 

What is not included on a P&L report: not all the cash that’s gone out of your business. It only shows the cash gone out of your business that goes towards your cost and business expenses (what you’ve spent). 

What Is Cash Flow?

Your cash flow and profit are different things, therefore they are different numbers. Profit doesn’t include as ins and outs as cash flow does. Profit doesn’t take into account things such as paying yourself or the amount of money that you’ve taken out personally or put in personally. 

Cash flow includes the amount you pay to your credit card or on a loan or debt payment because cash flow includes the payment of liabilities. When you pay a liability, it’s not categorized as an expense because it was already categorized and accounted for when you spent the money.  Your cash flow shows credit card or loan or debt payments because they are liabilities. 

Cash flow is actual cash, not when someone owes you money. It is true cash coming out of your business and includes payments for liabilities, paying yourself, paying owners, loans you receive, and more.

How Much Money Do I Really Have?

When comparing your bank balance to your profit and loss report, you might be wondering which number is correct. You should start by looking at your profit, not at your bank balance. Strategize on how you want to spend your profit and start allocating it to either invest, pay for taxes, etc. Remember though that you don’t actually have this amount of money in the bank because you’ve already made decisions along the way on how to spend your profit, whether on credit card payments or other purchases. Your goal should be to get to the point where you have more money in your bank account that you have in profit so you can allocate it easier. 

Both your profit and your bank balance numbers are important and both represent what is left over. Your profit is how much you actually made, while your bank account is how much you have on hand. They’re equally important and you should treat them as such. 

Are you studying both your cash flow and your profit and loss report? 

LINKS MENTIONED

EP 19: What reports do I need to look at for my business? 

https://podcasts.apple.com/us/podcast/what-reports-do-i-need-to-look-at-for-my-business/id1492829058?i=1000473632794

Free Profit & Loss Template (inside the Biz Finance Survival Kit) 

andismiles.com/survivalkit

Healthy Cash Flow Management That Won’t Freak You Out!

https://andismiles.com/2017/03/21/healthy-cash-flow-management/

How to Avoid Feast or Famine in Your Business https://andismiles.com/2018/04/02/how-to-avoid-feast-or-famine-in-your-business/