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Why Your Business Profit Doesn't Equal Your Bank Account Balance Thumbnail

Why Your Business Profit Doesn't Equal Your Bank Account Balance

One of the biggest questions we get asked is why doesn’t my business profit equal what's in my bank account?

Many dentists or doctor practice owners are familiar with looking at their profit and loss statement.
They get a monthly statement from their bookkeeper or accountant and many times their eyes go straight to the bottom of the page to look at profits.

It may seem like a good month or year until you look at your bank account and see a much lower number there.

Where did your profits go?

Top 3 reasons why your business profit doesn't equal your bank account

1. Owner Distributions or Personal Expenses

Anytime you withdraw money personally this is going to affect your bank balance. 

These may be easy to identify if you have taken money out in large amounts.   Let's say you have profit of $50,000 this month, your bank balance is showing $20,000 and your owner distribution account is showing $30,000. 

$50,000 Profit
-$30,000 Distributions
$20,000 Bank Balance

If you took a $30,000 owner draw last month, then it would be easy to see that is where the money went and why you don't have all of your profits in your business bank account. 

But what if you didn't withdraw that $30,000 in a large check.  When you review your distribution account, it's a bunch of little transactions.

This typically happens when you are using your business credit card for personal expenses.  Anytime you pay a personal expense from your business account, you have increased your owner distributions and lowered your bank balance.

In a given month, this may not feel like much, but over time doing that here and there can really add up by year end. 

2. Debt Payments Made to Loans / Credit Cards

Another reason your business profit is missing from your bank account is attributed to your business debts.

Let’s say that you purchased a $150,000 piece of equipment for your practice a couple years ago on credit.  You decided to accelerate the tax deduction in the year of purchase and you wrote off the entire $150,000.

But since you took a loan out to pay for it, you still have to make the monthly payment.  That payment is going to come from your profits. Let's say that your principal payment this year was $30,000.

$150,000 Profits
- $30,000 Principal Payments
$120,000 Bank Balance

Again it's likely easy to see when you are dealing with big numbers.  Other debt payments also count like when you pay for credit cards that carry a balance.   

Using a credit card for your business purchases has it’s advantages.  You get credit card points, you don’t necessarily have to worry about whether you have the cash / overdraft issues and it feels easier to track in one account.

The problem is many times business owners don’t pay off their credit card balances every month.  When you swipe the credit card to make a purchase, the expense of that items likely ends up on your profit and loss statement as an expense.  It increases your business expenses and decreases your profit, which ultimately lowers your profits.

When you don’t pay it off each month though you have to use future profits to pay down that debt. Again this starts out as a small number, but overtime it creeps up and up until you are using a large amount of your profits.

3. Equipment Purchases on Credit- Year of Purchase

This actually could work the other way.  Where your business profits are lower than what is in your bank account.  

Let’s say that this year you decide to purchase a $150,000 machine for your practice on credit.  You sit down with your CPA and decide that it makes sense to accelerate the tax write off and take the entire deduction this year.

That write off gets moved to your profit and loss lowering your profits.  It would look like this.

$200,000 Profits before Equipment Deduction
-$150,000 Equipment Deduction
$50,000 Profits

Since you purchased this on credit, your overall debt went up.  But your bank balance didn’t.  So assuming no distributions or other debt payments were made that year, your bank balance would be $200,000 even though your profits are $50,000.  

If your business profit doesn't match what is in your bank account, then start with the big 3 above.

Reports to find why your Business Profit doesn't match your bank balance?

The 2 reports you likely are getting each month is your profit and loss statement and your balance sheet.

Your profit and loss statement will show you your profits.  Your balance sheet shows your bank balance.   If you run a comparison balance sheet for the same time period as your profit and loss, then that will tell you where your profits went.

Let’s say you are looking at the first 6 months of 2019.  Here are the reports you need to run.

1. Profit and Loss Statement Report Time frame Jan 1 - July 31 = Profits

2. Comparative Balance Sheet- you will want to run a comparison  Balance sheet as of July 31 2019 compared to Balance Sheet as of Dec 31 2018.  

You'll want to look for the 3 big accounts we talked about above.  On there you should see changes in debts, and changes in equipment assets.  Did your overall debts go up or down?  You will also see what amount you have in your owner distributions account on the balance sheet.

Another report you can use is Cash Flow Statement or Summary report.  This report is going to show where your money went.  Your money typically starts with profits and then gets adjusted to then match your bank account at the bottom.

This report can look intimidating and long.   Just focus on the big 3 above and you should  get a good idea why your business profits don’t match your bank account.

If you need help reviewing your practices cashflow, contact us today