Why your profit and bank balance don't match
Your profit report shows $4,000 for the month. Your bank account only grew by $1,000. Where did the other $3,000 go?
The difference may have a straightforward explanation. Profit measures income after expenses for a period. Your bank balance reflects the cash in that account at a particular time, including money that moved for other reasons.
If you run a small business in Yakima County, learning to connect those two numbers can make your monthly bookkeeping review more useful. Start by comparing the same dates and checking that your records are complete.
A simple example
Imagine a sole proprietor with one business bank account. This is a fictional teaching example using cash-basis records: customer payments received and operating expenses paid during the month. It leaves out taxes, interest, equipment purchases and other transactions so we can follow two specific differences.
The account starts the month with $5,000. During the month, the business receives $10,000 from customers and pays $6,000 in operating expenses. In this simplified example, profit is $4,000.
The owner also takes a $2,000 draw for personal use and pays $1,000 of loan principal. Here is what happens to the bank account:
Starting bank balance: $5,000
Customer payments received: +$10,000
Operating expenses paid: −$6,000
Owner draw: −$2,000
Loan principal repaid: −$1,000
Ending bank balance: $6,000
The account increased by $1,000. The profit calculation was $10,000 minus $6,000, or $4,000. The draw and principal payment account for the $3,000 difference in this example.
For this sole proprietor, the owner draw reduces cash and owner's equity; it is not an operating expense. Repaying loan principal reduces cash and the amount owed on the loan. Interest is a separate part of a loan payment and needs its own treatment. Owner payroll, distributions and withdrawals also need the right treatment for the particular business structure.
Start with the dates and the records
Compare a full month's profit report with that same month's change in cash. A month-end bank balance includes money that was already there at the start of the month. Comparing it directly with one month's profit skips that starting point.
Next, check whether the bank account has been reconciled. Reconciliation means matching the bookkeeping records to the bank statement and explaining any differences. Missing transactions or duplicates can make a sensible explanation harder to find.
The monthly records checklist is a practical starting point for gathering what your bookkeeper needs.
Ask three questions at your monthly review
Are we reviewing the same period? Agree on the beginning and ending dates before comparing the reports.
Which movements changed cash without changing this period's profit? Ask your bookkeeper to walk through the actual transactions behind the difference, rather than guessing from the bank balance.
What money already has a job? Review bills, scheduled payments and other commitments before treating the ending balance as available to spend.
Your own business may have more accounts and different reporting methods than this example. Ask for an explanation that connects your actual reports and records. You should be able to follow the explanation and ask questions along the way.
Make the numbers useful
For a contractor, this review can sit alongside the question of how individual jobs performed. Our guide to job costing and bookkeeping explains the different levels of detail.
Courage Bookkeeping helps small-business owners in Yakima and Yakima County with bookkeeping and understanding their numbers. If you want help making sense of your monthly records, let's talk about your business.