I Made A Profit, So Where Is All My Money?

You had a stellar year, closed a record number of deals, and made a handsome profit. Then, you look at your bank account, and think “… wait, where is all my money?”. I get asked this question all the time.

Expenses and Revenue are what move the needle when it comes to Profit. But not all withdrawals and deposits are expenses or revenue.

What would affect my bank account balance, but not my profit?

Loan payments

If you make monthly loan payments, your bank account balance will diminish, but this will have no effect on your profit, as it is not considered an expense. If you purchase a business vehicle, for example, you will benefit from the expense in the form of depreciation, but paying the loan you took out to purchase that vehicle, is not an expense.

Dividends or Owner’s Draws

Whether your business is a proprietorship or a corporation, you as the owner or shareholder can choose to withdraw funds for personal use in the form of Owner’s Draws or Dividends. These are not considered business expenses, therefore they will not lower your profit, but they will lower your bank account balance.

As a side note, in a corporation, you can choose to pay yourself in the form of a salary, which IS considered a business expense and WOULD affect your profit.

Purchasing Assets and Investments

Let’s go back to the example of purchasing a vehicle. If you pay that vehicle in full or make a down payment on it, it can significantly lower your bank balance, but it will not touch your profits. The cost of the vehicle will be amortized over a number of years, and a portion of the depreciation is what will lower your profit each year.

Pre-payments made

A common example of a pre-paid expense is insurance. You may pay your yearly insurance premium in one shot, lowering your bank balance, but only a fraction of that amount will be considered an expense in the current year, the remainder being considered an asset.

Pre-payments received

An amount of money received before having been earned will have the opposite effect of increasing your bank account, but not your profit. Think of receiving an advance on next month’s commission, for example.

What would affect my profit, but not my bank account balance?

Accounts Receivable

Having a large amount in your Accounts Receivable means you have earned revenue, for which you haven’t been paid yet, so the profit will not have materialized into cash yet.

Accounts Payable

Similarly, a large amount in your Accounts Payable means you have business expenses that have lowered your profit, but as they haven’t been paid yet, your bank account balance wouldn’t have moved.

Depreciation

Depreciation or Amortization is how you get to expense most assets. If we use the example of purchasing a business vehicle again, the purchase of that vehicle will not be considered an expense, but you will be able to claim a portion of the expense, the depreciation, each year. The depreciation amount will lower your profit each year, but no money is actually coming out of your bank account each year.

Conclusion

Profit doesn’t equal cash. While your Profit & Loss statement will show you the breakdown of all your expenses and revenue, and the resulting profit (or loss), it will tell you little about your cash situation. To get a better picture of your financial situation, you should also be relying on your Balance sheet and your Cash flow statement. These should help give you clarity if you find yourself wondering where all your money went!

Disclaimer: The information provided in this blog is intended for general informational purposes only. It does not cover every possible scenario or exception and may not apply to your specific situation. For personalized advice and to ensure compliance with all relevant regulations, please consult with your accountant or financial advisor.