Why your profit and your bank balance don’t match

Your accountant tells you the business made £80,000 last year. Your bank account has £12,000 in it. Nobody has stolen anything, nothing has gone wrong, and both numbers are correct.

Why don’t they match? It’s the question I hear most from business owners, and they usually ask it slightly apologetically, as if they should already know. They shouldn’t. Profit and cash measure two different things, and nothing about running a business teaches you that unless someone tells you.

Here’s what’s actually going on.

What is the difference between profit and cash?

Profit counts a sale when you do the work and invoice it. Cash counts it when the client pays.

Profit answers the question: over this period, did what we earned exceed what it cost us to earn it? Cash answers a much simpler question: how much money is in the account right now?

If your terms are 30 days and your client takes 60, that’s two months where the profit exists and the money doesn’t.

Some of the gap is timing like this. Some of it is money that never touches profit at all.

What opens a gap between profit and cash?

Six things, seven if you hold stock: unpaid invoices, VAT you are holding, corporation tax not yet due, loan capital repayments, assets you have bought, and money you have taken out. For most businesses, unpaid invoices are the largest.

Invoices you have raised but not been paid for. Every unpaid invoice is profit you have already recognised and cash you have not yet received. A business growing quickly feels this most: more sales means more money tied up in unpaid invoices at any one time. That’s why growth so often feels like getting poorer, not richer.

VAT you are holding. If you are VAT registered, a portion of what has landed in your account belongs to HMRC. It’s in your bank, it isn’t your money, and it leaves on a schedule that has nothing to do with how your month is going. Businesses that treat their bank balance as available cash get caught by this every quarter.

Corporation tax on profit you have already made. It accrues as you earn and isn’t payable until 9 months and 1 day after your year end, so for most of the year it sits in the account looking like working capital. On £80,000 of profit, a standalone company with no associated companies is holding a little over £17,000 of it - the rate runs from 19% to 25% depending on where the profit falls.

Loan and finance repayments. When you repay a loan, the interest is a cost and shows in your profit. The capital repayment isn’t. It’s paying back money you borrowed, which never counted as income when it arrived. So the cash leaves your account and your profit figure doesn’t move. The same applies to hire purchase and most asset finance.

Things you have bought that last. Buy a laptop, a vehicle or equipment, and the money goes out at once. The profit and loss doesn’t take the whole cost at once - it spreads it across the years you will use the asset, as depreciation. Big purchase, small hit to profit, immediate hit to cash.

Money you have taken out. Dividends and drawings reduce your bank balance and don’t appear as a cost in your profit at all. If you’ve paid yourself in dividends across the year, that money has left without touching the profit figure. This one surprises owners more than any of the others.

Stock, if you hold it, is the seventh: cash spent, sitting on a shelf, not yet a cost.

Which number should you watch?

Both, for different decisions. Each is silent on the question the other answers.

Profitable businesses do run out of cash. Running out of money while trading profitably is one of the more common ways a growing business fails. It’s why Ozria puts a cash view in front of clients every month, not once a year.

The mistake is treating either number as the whole picture.

How do you stop the gap catching you out?

Four habits: a 13-week cash forecast, a separate account for VAT and PAYE, knowing how old your unpaid invoices are, and seeing profit and cash side by side every month.

Get a forecast that looks forward, not just accounts that look back. A rolling 13-week cash view - money expected in, money committed out, week by week - will tell you more about your next three months than any set of annual accounts. It doesn’t need to be sophisticated. It needs to exist.

Separate the money that isn’t yours. VAT and PAYE, at minimum. A second account you move the money into as it comes in is unglamorous and it works. You stop making decisions against a balance that is partly HMRC’s.

Know your receivables position. Not the total - the age of it. Money owed for 90 days behaves very differently from money owed for 20, and the difference between them is most of your cash problem.

Look at both numbers together, monthly. A profit figure with no cash context, or a bank balance with no profit context, will lead you to the wrong conclusion sooner or later. The point of proper monthly reporting is that it shows you both at once, which is part of what Ozria’s monthly retainers cover.

Where should you start?

You’re not confused because you’re missing something obvious. The two numbers you’ve been handed measure different things, and nobody explained which question each one answers. Profit tells you whether the business works. Cash tells you whether it can keep going while it does. If you only see one of them each month, that’s the gap worth closing first.

Ozria Consulting runs the outsourced finance function for ambitious businesses. If your numbers don’t tell you what you need to know, book a discovery call.