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Why does my profit and loss disagree with my bank balance?

Both numbers are telling you the truth. They just answer different questions. Your profit and loss statement measures economic performance over a period of time. Your bank balance measures how much cash you have at a single moment. For an established business with any complexity, these two numbers will almost never match.

Several things create legitimate gaps between profit and cash.

Accounts receivable is one of the most common. When you send an invoice, you’ve earned that revenue and it appears on your profit and loss. But until the customer actually pays, the cash hasn’t arrived. A business showing $80,000 in profit for the quarter might have $60,000 sitting in unpaid invoices. The profit is real. The cash just hasn’t come in yet.

Loan principal payments work in the opposite direction. When you make a payment on equipment financing or a business loan, only the interest portion is an expense on your profit and loss. The principal portion reduces your cash but doesn’t touch profit at all. A business paying $3,000 a month on a truck loan might only be expensing $400 in interest while $2,600 disappears from the bank account every month without showing up as an expense anywhere.

Owner draws and distributions also consume cash without affecting profit. Money you take out of the business for personal use reduces your bank balance but is not a business expense. On your profit and loss, the business still earned that money. It just left.

Equipment and other capital purchases create a gap that surprises many owners. When you buy a $40,000 piece of equipment, your cash drops by $40,000 but your profit and loss only shows the depreciation expense spread over several years. That first year might show $8,000 in depreciation while $40,000 actually left your bank account.

Working the other direction, depreciation is an expense that reduces profit without any cash moving at all. The cash left when you bought the asset. The expense hits your profit and loss gradually over time.

Prepaid expenses and deposits tie up cash without creating expenses. You pay six months of insurance upfront but only expense one month at a time. Security deposits on a lease sit as assets on your balance sheet. Cash is gone, but the profit and loss doesn’t reflect it yet.

If you bill customers in advance or collect deposits for future work, you have cash that isn’t revenue yet. The money is in your bank account but it shows up as a liability on your balance sheet until you earn it by doing the work.

The balance sheet is what bridges these two statements. It tracks the receivables you’re owed, the payables you owe, the equipment you own, the loans you’re paying down, and the equity you’ve built or withdrawn. Accrual-based accounting with a proper balance sheet shows the complete picture.

Understanding this gap matters for decision making. A profitable business can run short on cash if receivables pile up, loan payments are heavy, or the owner takes too much out. A business with a healthy bank balance might be burning through cash faster than it appears if profits are propped up by one-time events or if big expenses are coming due.

Accounting and advisory services that include regular financial reviews connect these two pictures for you. The profit and loss tells you whether your operations are working. The bank balance tells you whether you can meet your obligations. Together, with the balance sheet as the link, they tell you where your business actually stands.

If you’d like help understanding how your profit and cash flow connect, schedule a consultation and we’ll walk through it together.

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More Questions

If I pass GET on to my customers, why is the right rate 4.712 percent and not 4.5?

Hawaii's General Excise Tax applies to your entire gross income, including the GET you collect from customers. Passing on exactly 4.5 percent leaves you short because you owe tax on that tax. The 4.712 percent rate accounts for this tax-on-tax effect.

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What kind of client gets the most out of working with you?

Established, growing businesses with organized ownership who value structure and want to understand their numbers. The fit runs deepest in construction and real estate, professional services, and technology.

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What should financial statements look like before I show them to a lender or partner?

Financial statements for lenders or partners should be current within weeks, internally consistent with the underlying books, and presented on accrual basis. They need to be clean of errors like negative balances, uncategorized piles, and intercompany confusion that erode trust.

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My banker asked for accrual financial statements. What is she really asking for?

Your banker wants to see the real economics of your business, not just when cash moved. Accrual statements show revenue when earned and expenses when incurred, revealing receivables, payables, and work in progress that cash-basis books hide.

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What KPIs should an established business actually watch?

The right set is five to seven metrics, not twenty. Most established businesses need cash position and forward cash, margin by the lines that matter, receivables aging, and labor or delivery cost as a percentage of revenue, plus one or two numbers specific to their industry.

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Does GET apply to rent my business collects on a long-term rental property?

Yes. Hawaii's General Excise Tax applies to gross rental income from long-term residential and commercial properties. This surprises many mainland investors, but rent is treated like any other business income under the GET.

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