It’s a familiar routine for many business owners. You log into your bank account, check the balance, and feel reasonably good about how things are going. There’s money in the account. Bills are getting paid. Customers are paying their invoices. Everything looks fine.
But your bank balance is only one piece of your financial picture. And sometimes, it can be a misleading one.
Money in the Bank Isn’t the Same as Profit
Let’s say your business has $25,000 in its checking account. That sounds encouraging. But consider what that balance doesn’t tell you.
Perhaps you have $8,000 in outstanding vendor bills, $4,000 in upcoming payroll obligations, and a $3,000 credit card payment due next week. Suddenly, that comfortable $25,000 doesn’t look quite so comfortable.
And even after accounting for those obligations, the remaining cash doesn’t necessarily represent profit. Profit is determined by your revenue and expenses over a particular period. Your bank balance reflects cash available at a particular moment. Those are two very different measurements.
Your Bank Account Doesn’t Explain Where the Money Went
Suppose your business earned a healthy profit last month, but your bank balance actually decreased. How can that happen?
There are several possibilities:
- You made payments toward the principal on a business loan.
- You purchased equipment.
- You paid bills from previous months.
- You took an owner’s draw or distribution.
- Customers haven’t paid outstanding invoices.
Depending on the circumstances and your accounting method, these activities can affect cash without affecting current-period profit in the same way.
The reverse can happen, too.
You might see a significant increase in your bank balance because you received loan proceeds or contributed personal funds to the business. Your cash increased, but that doesn’t mean your business earned more revenue.
Without accurate bookkeeping, it’s easy to misunderstand what those changes mean.
Your Financial Reports Tell Different Parts of the Story
Three financial reports are particularly useful when evaluating the health of a small business.
Profit and Loss Statement
Your Profit and Loss statement shows revenue, expenses, and net income over a specified period.
It helps answer questions such as:
- Is the business profitable?
- Are expenses increasing?
- Which costs are consuming the most revenue?
- How does this month’s performance compare with previous months?
Balance Sheet
Your Balance Sheet shows what your business owns, what it owes, and its equity at a particular point in time. It includes items such as bank accounts, loans, credit cards, equipment, and other assets and liabilities.
A business can report a profit while still carrying significant debt or facing cash shortages. The Balance Sheet provides important context that the Profit and Loss statement cannot.
Statement of Cash Flows
The Statement of Cash Flows explains how cash moved into and out of the business through operating, investing, and financing activities. It can help explain why your cash balance changed even when the Profit and Loss statement tells a different story.
Together, these reports provide a much more complete understanding of your business than a bank balance alone.
Accurate Reports Depend on Accurate Bookkeeping
Of course, financial reports are only useful when the information behind them is reliable.
If loan payments are incorrectly recorded as expenses, revenue is duplicated, or transactions are assigned to the wrong accounts, your reports can tell a misleading story. Accounting software makes financial reports readily available, but it cannot guarantee that every transaction has been recorded correctly.
That’s where professional bookkeeping makes a difference.
Regular reconciliations, accurate transaction classification, and careful review help ensure that the numbers you’re relying on actually mean what you think they mean.
Look Beyond the Balance
Checking your bank balance is a perfectly reasonable habit. Knowing how much cash is available is important, especially when you’re managing day-to-day expenses. But it shouldn’t be your only measure of financial success. Take time to review your financial reports, understand what they’re telling you, and look for changes that deserve attention.
Your bank account can tell you how much money you have today.
Your financial reports can help you understand how your business got there—and where it may be headed.
Gwinn Bookkeeping LLC provides professional remote bookkeeping services for small businesses using QuickBooks Online. From monthly reconciliations and financial reporting to cleanup and QuickBooks training, we help business owners maintain accurate financial records and better understand their numbers.
