“Where is my money going?” It is one of the most common questions owners ask, and it usually follows a month that looked good on paper. The profit and loss says the business made money. The bank balance says otherwise. Both can be right.
What the profit and loss measures
The profit and loss shows what the business earned over a period and what it spent to earn it: sales, minus costs like payroll, rent, supplies, and software. What is left is net income. It is the right report for one question, whether the business is profitable.
Where cash goes that the profit and loss does not show
- Loan principal. The interest on a loan is an expense. The principal you pay back is not, so it never appears on the profit and loss, yet it leaves the bank every month.
- Equipment and other large purchases. A major purchase is usually recorded as an asset and expensed a little at a time, while the cash goes out at once.
- Owner draws and distributions. Money the owners take out is not an expense of the business. It lowers cash without lowering profit.
- Taxes. Depending on how the business is set up, income tax payments can leave business cash without appearing on the profit and loss.
- Timing. Sales billed but not yet collected count as income before the cash arrives. Bills owed but not yet paid count as costs before the cash leaves.
Try it with your own numbers
The calculator below starts with round example figures. Replace them with a month of your own to see how a profit turns into the change in your bank balance.
Which report answers which question
- Is the business profitable? The profit and loss.
- Where did the cash go? The balance sheet and a view of cash: loan balances, what you owe and are owed, and what the owners took out.
- Can we cover what is coming? A short-term cash forecast: the money expected in and out over the next few weeks.
Read together, every month, these reports turn “where is my money going?” into an answer. That is also why a monthly review is worth the time: the numbers mean more when someone walks through them with you.