Why Am I Profitable but Broke?
Your P&L shows the business made money last year. Your CPA may have even sent you a tax bill on that profit. And yet the checking account is about where it was twelve months ago, or lower. If you’ve been staring at both trying to figure out which one is wrong, the good news is that they’re probably both right. Profit and cash measure different things, and the gap between them is one of the most common things we see in the books of service businesses.
Meet Dave
I use a sample business in my talks called Two Guys in a Truck, owned by a guy named Dave. Dave’s company does about $1.2M a year. Here’s how last year looked:
| Amount | |
|---|---|
| Revenue | $1.2M |
| Operating income (before interest) | $72k |
| Net income (after interest) | $60k |
| How much the bank balance went up for the year | $13k |
Dave made $60k in profit and ended the year with only $13k more in the bank. Nobody stole anything and the books aren’t wrong. The other $47k went to things that either don’t show up on the P&L or show up there differently.
Where the Money Went
Here’s one way Dave’s year could break down. Every business is different, but most of the gap lands in the same few places:
| Step | Cash impact |
|---|---|
| Net income | +$60k |
| Add back depreciation (an expense on the P&L that didn’t use any cash this year) | +$20k |
| Customers owe more at year end than they did at the start | ($15k) |
| Cash spent on a new truck and equipment | ($22k) |
| Principal paid on loans | ($18k) |
| Owner distributions | ($12k) |
| Change in cash for the year | +$13k |
Not one of those four drains is wrong on its own. The truck probably needed replacing, the loans have to get paid, and Dave has to eat. They just don’t show up on the P&L the way owners expect them to, so it’s easy to make decisions off a profit number that isn’t sitting in the bank.
The Usual Places Cash Goes
1. Loan payments
Only the interest on a loan shows up as an expense on the P&L. The principal, which is usually the bigger part of the payment, comes out of cash without touching profit at all. A business with a couple of truck loans and an equipment note can have several thousand dollars a month leaving that never appears on the P&L.
2. Owner draws and distributions
Depending on how your business is set up, what you take home may not show up as an expense on the P&L either. It comes straight out of cash. That’s normal, but it means the profit on the P&L is before you’ve been paid. (How owner pay is set up for taxes is a question for your CPA.)
3. Trucks and equipment
When you buy a $60k truck, the P&L doesn’t take the whole $60k as an expense in that month. It spreads the cost out over several years as depreciation. The cash, or the down payment, leaves the day you buy it.
4. Customers who haven’t paid yet
Revenue shows up on the P&L when you do the work and send the invoice. The cash shows up when the customer pays. If customers are taking longer to pay, or you did a lot of work late in the year, profit is sitting in receivables instead of the bank.
5. Materials and inventory on the shelf
Parts and materials you bought but haven’t used yet are cash that’s been spent, but they won’t show up as a cost until they go into a job. A few pallets of pavers or a shelf full of condensers can easily be tens of thousands of dollars.
6. Paying vendors faster than customers pay you
If you pay suppliers in 10 days and customers pay you in 45, you’re funding the gap. Paying vendors closer to their due date, instead of the day the bill shows up, keeps more cash in the account without costing you anything, as long as you still pay on time.
7. Sales tax and payroll taxes you’re holding
If you collect sales tax, that money belongs to the state, and payroll taxes withheld from employees belong to them and the government. It sits in your account until it’s due, and if it gets spent on operations, the bill still comes.
A Quick Check for Your Own Business
Here’s a simple way to see whether the gap is normal or something to dig into:
Change in cash for the year ÷ revenue = net cash flow %
Then compare it to your net margin (net income ÷ revenue). For Dave, net cash flow is about 1% ($13k on $1.2M) while net margin is 5%. A rule of thumb I use is that net cash flow % should track reasonably close to net margin % over time. If it’s consistently well below, more cash is leaving through loan principal, owner draws, equipment, or slow customers than the P&L shows, and it’s worth finding out which one.
It also helps to look at the balance sheet next to the P&L. The P&L shows how the business performed. The balance sheet shows what you own, what you owe, and what customers owe you, which is where most of the missing cash turns up.
What to Do About It
Each of these has a fix, and most of them come down to planning ahead: knowing how much of your profit is already spoken for by loan payments, putting owner pay on a plan, timing equipment purchases, collecting faster, and keeping tax money separate. Which ones matter most depends on where your gap is, and that’s the part worth working through with someone who can look at your actual numbers.
If you’re growing quickly, there’s a second set of reasons cash gets tight, like hiring ahead of the revenue and carrying more receivables. Why Growth Doesn’t Always Mean More Money covers that side.
Where to Start
If you want one thing to do this week, pull your bank balance from the start of last year and the end of last year, and compare the change to your net income. If there’s a big gap, list the loan payments, owner draws, and equipment purchases from the year and see how much of it they explain.
If the gap doesn’t add up, or you’d like help seeing where your cash is going, a free Cash Clarity Call is an easy place to start, and we can walk through your numbers together.
