Here at Fisher Business, we get asked this question a LOT. Pretty much every business owner and entrepreneur we work with asks this question. Here is the most common question, with a graphic to further explain.
QUESTION: My Profit and Loss (P&L) shows profit at the bottom, but there is no money in the bank. Where did the money go?
ANSWER: The Balance Sheet.
OK, I know that’s rude. Answering that question with an accounting person’s answer is unfair, and if you understood the bridge, you wouldn’t be asking the question, so I’ll take it step by step.
PAUSE FOR DEFINITIONS:
Balance Sheet: A snapshot of balances of every asset you have and liability you owe. It is a single moment in time.
Profit and Loss: A statement of profit or loss for a specific period. A month? A year? The timeline is important.
BACK TO THE ANSWER:
When money is showing on the profit and loss, and you don’t actually have any money, it generally has gone to the balance sheet. This means you either added to an asset account (do people owe you a bunch of money?) or decreased a liability (is your credit line balance lower?).
Other things that may have happened:
An investment in equipment or assets such as Research and Development, a remodel, cars, website, lawsuits, etc.
Or, you are working out of a hole, and simply aren’t seeing the upside on your Profit and Loss: you owe your vendors less, your loan balances are lower, etc.
When these things aren’t true, something else can be going on, and it’s usually not good. This is where we find embezzlement, theft, or shady books. If it’s because owner draws aren’t accounted for, we can fix that quickly. If it’s due to other unforeseen circumstances, we can define them readily and help you make decisions about how to best handle the situation for your business.
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).