Your P&L says you’re profitable, but your bank account tells a different story.
How do you get to the truth? Three specific things hide it, and all three live on the balance sheet instead of the P&L.
1. Inventory Purchases
You spend real cash to buy inventory, but it only shows up on the P&L once the product actually sells. Until then, that cash is sitting in a warehouse while your P&L looks perfectly fine.
2. Loan Principal
Your P&L captures the interest expense, but the actual principal payment goes straight to the balance sheet. You’re spending real cash to pay down debt every month, and your P&L never shows it.
3. Owner’s Draw
When you take money out of the business, it reduces your cash, but it doesn’t touch the P&L at all.
Add all three together, and that bottom-line profit number starts to look a lot different. It exists on paper, but it doesn’t necessarily exist in your bank account.
For this reason, I tell clients that cash in the bank is the real measure of success, not the bottom line on a P&L.
A business can look profitable and still be quietly eating cash faster than it produces it. The P&L won’t tell you that, but your bank account will.
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One question before you go I am revising my current book, Profit First for Ecommerce Sellers, and I don’t want to write it from research alone. I want to write it from what is actually happening in your business. Could you help me out by answering the below question?
Which Title and Subtitle would make you want to read the book? Title: |
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Quick Summary
- Your P&L can show profit while your bank balance shrinks — the gap lives on the balance sheet, not the income statement.
- Inventory purchases use cash immediately but only hit the P&L when the product sells.
- Loan principal payments reduce cash but never appear as a P&L expense (only the interest does).
- Owner’s draw reduces cash without touching the P&L at all.
- Cash in the bank — not the bottom line — is the real measure of business health.
FAQ
Why does my P&L show a profit if I have no cash?
Because three cash outflows — inventory purchases, loan principal payments, and owner’s draw — never appear on the P&L. They reduce cash but show up on the balance sheet instead.
Is profit the same as cash flow?
No. Profit is an accounting measure of revenue minus expenses. Cash flow tracks the actual money moving in and out of your bank account, including inventory, debt payments, and draws that don’t appear on the P&L.
What’s the best way to track real cash health in my business?
Track your bank balance alongside your P&L, and use a cash flow or Profit First system that accounts for inventory purchases, debt principal, and owner’s draw separately from operating profit.
If you’d like help understanding what your P&L isn’t showing you, reach out and let’s chat.
Cyndi
