Why your profit and your bank balance disagree

Your P&L says you made money. Your bank account disagrees. Both are usually right. They measure different things, and the gap between them is where most cash surprises come from.

1. Invoices you haven't been paid for

On most books, a sale counts as income when you invoice it, not when the money arrives. Thirty-day terms mean a profitable month can arrive in the bank a month later. Growing fast makes this worse, because the unpaid pile grows with you.

2. Inventory

Stock you buy leaves the bank today, but it only becomes an expense when you sell it. A shop that buys ahead for the holidays can show a healthy profit and an empty account in October.

3. Loan principal

Only the interest on a loan is an expense. The principal you repay each month is real cash going out, but it never appears on the P&L. A business with a large loan can look profitable and still be short every month.

The P&L tells you whether the business works. The cash forecast tells you whether you can pay for it.

4. Owner draws

Money you take out as an owner of a sole proprietorship or partnership isn't an expense either. It reduces cash, not profit. Draws that are larger than profit will drain the account however good the P&L looks.

5. Taxes set aside

Estimated tax payments go out four times a year in lumps. If you don't set money aside monthly, a profitable quarter can be followed by a payment that empties the account.

Reading both reports together

Look at the P&L and the cash summary side by side each month. When profit is high and cash is low, one of the five reasons above is usually the answer, and the balance sheet shows which: receivables, inventory, loans or the owner's equity. When both are high, it's a good month. When both are low, it's time for a conversation.

What to do about each one

Shorter payment terms and prompt invoicing close the first gap. Buying stock closer to when it sells narrows the second. Loan repayments and draws belong in the monthly budget, not in the hope column. And a monthly transfer for taxes turns four lumps into twelve small steps.

Seeing it coming

This is what a 13-week cash forecast is for: every expected payment in and out, week by week, updated after each close. It turns the gap from a surprise into a plan.