#20 Why is my Monthly P&L Report Different from What I Have in the Bank?

by | May 12, 2020

About This Episode

We’re following up last week’s episode about your Profit & Loss Report with more questions about your reports! 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’s Not Shown on a Profit & Loss Report?
  • What’s 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’s Not Shown on a Profit & Loss Report?

A Profit and Loss report only accounts for the cash that’s gone out of your business to pay for your cost and business expenses (basically what you’ve spent). But what about credit card payments? Tax payments? And paying yourself?

All of those numbers don’t show up on a Profit and Loss report because these aren’t typically considered business expenses. That doesn’t mean that they don’t impact your business finances or affect your business. But these types of outflow are part of your cashflow.

What’s Cash Flow?

Cash flow is actual cash, not the expectation to get paid (like if someone owes you money). It’s true cash coming in or going out of your business and includes payments for liabilities, paying yourself, paying other owners, loans you receive, the money you invest in your business and more.

Your cash flow and profit are different things…and different numbers. Profit only includes a portion of the money that comes in and goes out of your business. Namely, your income, costs, and expenses.

Cash flow accounts for the same things as profit and more. Think of cash flow as the umbrella of where your money goes and the numbers shown on your Profit & Loss report are under that umbrella. But those numbers aren’t the only ones under the umbrella.

Cash flow includes liability payments, like your business credit card, loan or other debt payment. 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 accounts for credit card or loan or debt payments because they are liabilities.

Likewise, cash flow accounts for money that you put in or take out of your business. Again, this money isn’t actually income or an expense, rather it’s equity, and so it doesn’t appear on your Profit & Loss report or impact how much profit you have.

How Much Money Do I Really Have?

When comparing your bank balance to your Profit & 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 back into your business, save for taxes, pay off debt, or pay yourself.

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 than 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.

Ready to start getting down with your Profit & Loss report? Snag my free Profit & Loss template in my Biz Finance Survival Kit.

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