I got a great question from a client recently that I think many business owners have wondered about at some point. She asked, “How can I have a negative net income this month when I have such a large balance in my bank account?”
It’s a great question—and the answer comes down to understanding the difference between net income and cash in the bank. Let’s break it down.
- Timing is Everything
Your Profit & Loss (P&L) statement shows income and expenses for a specific period—say, the month of April. But your bank account balance is a reflection of all the money that’s ever come in or gone out, not just April.
So if you collected a big payment in March and didn’t spend much of it until April, your April P&L could show a loss, while your bank account still looks healthy.
- Non-Cash Expenses Matter
Expenses like depreciation show up on your P&L, reducing your net income, but they don’t actually pull cash out of your bank account. That means your bottom line can look worse than your cash situation really is.
- Loan Payments and Owner Draws Don’t Show on the P&L
If you’re making loan payments or taking draws from your business, those won’t show as expenses on your P&L. But they do come out of your bank account. So you could technically show a net income but still see your cash balance drop—or the other way around.
- Receivables and Payables Confuse the Picture
If you invoice a client in April but don’t get paid until May, your P&L shows that income in April (if you’re using accrual accounting), but there’s no actual money in the bank yet. And if you incurred an expense but haven’t paid it yet, it still lowers your net income—even though the cash hasn’t left your account.
Bottom Line
Your net income tells you how your business performed in a given period. Your bank balance tells you how much cash you currently have. They’re connected, but not the same. And when you understand that difference, your financials start to make a lot more sense.
Need help making sense of your numbers? That’s what I’m here for.
