Almost every owner has had this month: the profit and loss says you made money, yet the bank account is lower than it was. Or the opposite: the bank looks healthy, but the P&L shows a loss. Neither statement is wrong. They are answering different questions.
The profit and loss asks whether the work you did this month earned more than it cost. The bank balance asks how much money you can spend today. Learning to read them side by side is one of the most useful habits you can build.
Why profit and cash drift apart
Nizam's Accounts app keeps your books on an accrual basis. An invoice counts as income on the day it is issued, whether or not the customer has paid, and a supplier bill counts as a cost when it arrives. Cash only moves when money actually changes hands. Between those two moments, the figures disagree.
The most common reasons for the gap are:
- Customers who have not paid yet. The sale is in your profit, but the money is in receivables, not the bank.
- VAT you collected. It sits in your bank account, but it belongs to the tax authority, so it is never your profit.
- Bills you have not paid yet. The cost is in your profit and loss, but the cash has not left.
- Money paid or received in advance. A customer deposit raises your bank balance before you have earned it.
Reading them side by side
- Open Profit and loss for the month and note the net figure and the gross profit.
- Open the Balance sheet at the last day of the same month.
- Look at what customers owe you under current assets. If it grew this month, part of your profit is still waiting to arrive.
- Look at VAT and supplier payables under liabilities. That is cash in the bank that is already spoken for.
- Open the Cash and bank book for the month to see each movement in and out, and the document behind it.
- If you run several branches, repeat the comparison for each one. A branch can be profitable while tying up cash in unpaid invoices.
Questions worth asking each month
Are receivables growing faster than sales? Then you are financing your customers, and it may be time to chase or shorten payment terms. Is gross profit falling while sales rise? Then costs are moving faster than prices. Is cash falling while profit holds steady? Look at what you paid out in advance or bought ahead.
Profit tells you whether the business works. Cash tells you whether it can keep going. Read both, every month, and neither will surprise you.