Profit in Xero but no cash in the bank: where the money went

It is one of the most common questions a business owner asks their bookkeeper: “Xero says we made a profit last month, so why is there less money in the bank?”

Both numbers are usually right. They measure different things. Profit is what the business earned less what it cost to earn it. Cash is what actually went in and out of the bank. The difference between them always shows up somewhere on the Balance Sheet, and once you know where to look you can find it in a few minutes. (If the Profit and Loss itself is hard going, start with how to read your Profit and Loss in Xero. For a broader monthly check, see how do I know if my business is doing well?)

Why profit and cash are different

Xero’s Profit and Loss is normally on an accrual basis. A sale counts as income on the date of the invoice, not the day the customer pays. A supplier bill counts as an expense on the date of the bill, not the day you pay it. Some purchases, repayments and payments to owners never appear on the Profit and Loss at all. (What is cash flow? sets the two side by side, with a month where the profit was 17,000 and the bank fell by 6,000.)

The Profit and Loss can also be shown on a cash basis, which counts sales and bills only when they are paid. Comparing the two views for the same month is a quick way to see how much of the gap is timing; see cash vs accrual in Xero for how to switch and what changes.

The usual places the money goes

Each of these takes cash out of the bank without reducing profit (or adds profit without adding cash):

Cause	What happened	Where it shows in Xero
Customers have not paid yet	You invoiced, so profit went up, but the money is still owed to you	Accounts Receivable on the Balance Sheet; the Aged Receivables report
You paid suppliers faster	Cash went out to settle bills that were already counted as expenses in an earlier month	Accounts Payable went down
Stock bought ahead of sales	If you track inventory, stock is an asset until it is sold	Inventory on the Balance Sheet (stock days)
Equipment or a vehicle	Bought with cash, but recorded as an asset; only depreciation reaches profit, a bit each month	Fixed assets on the Balance Sheet
Loan repayments	Only the interest is an expense; the principal reduces the loan	Loan accounts under liabilities
GST, VAT or sales tax paid	Tax you collected was never your income, so paying it over does not reduce profit	The GST, VAT or sales tax liability account
Income tax and provisional tax	Usually recorded against a tax liability, not as a monthly expense	Tax liability accounts
Owner drawings or dividends	Money taken out by the owners is not a business expense	Equity (drawings, current account or dividends)
Prepayments	An annual insurance or software bill paid up front and spread over the year	Prepayments under current assets
Exchange rate gains on paper	Open foreign currency invoices or a foreign bank account are revalued at today’s rate, so profit rises but no money arrives (unrealised currency gains)	Unrealised Currency Gains and Bank Revaluations on the Profit and Loss

The opposite happens too: see a loss in Xero but money in the bank below.

A worked example

Made-up figures for one month in a small trading business:

	Amount
Profit for the month (Profit and Loss)	$18,000
Customers owe $12,000 more than at the start of the month	−$12,000
Loan principal repaid	−$2,500
GST paid for the quarter	−$9,000
Owner drawings	−$5,000
Supplier bills owed $3,000 more than at the start of the month	+$3,000
Change in the bank balance	−$7,500

The business made $18,000 and the bank fell by $7,500. Nothing is missing. The largest single item is the $12,000 customers have not paid yet, and that is the part the owner can do something about this week.

To run your own figures through the same sum, use the free profit but no cash explainer. It lists where the cash went, biggest first, and runs in your browser without connecting Xero.

How to trace the gap in Xero

1. Run the Balance Sheet for two dates: the end of last month and the end of this month, side by side. Xero lets you add comparison periods to the Balance Sheet. (New to the report? See how to read your Balance Sheet in Xero, or profit and loss vs balance sheet for a full-year worked example.)
2. Go down the lines that changed. For each asset that went up (receivables, inventory, fixed assets, prepayments), cash went down by roughly that much. For each liability that went down (payables, loans, GST or tax owed), cash went down too. Equity drawings and dividends reduce cash directly.
3. Check the bank side. The Bank Summary report shows cash received and cash spent for each bank account over the period. The Statement of Cash Flows groups the same movements into trading, assets and loans and owners; see how to run and read the Xero Statement of Cash Flows.
4. Look at who owes you. If receivables went up, the Aged Receivables report shows which customers and how overdue they are. See Xero aged debtors and creditors reports for how to read it. The free debtor days calculator turns the total owed into how long customers take to pay on average, and how much cash that ties up beyond your terms. Who owes me money? covers who to chase first and the Xero settings that get invoices paid sooner.

If the lines you can explain do not add up to the change in the bank, check for unreconciled bank lines, transfers between your own accounts that were coded to an expense, and bank accounts that are not set up in Xero at all (a credit card or a second account). Those are the usual reasons the numbers do not tie. If the balance in Xero itself differs from your bank statement, find that gap first.

To do the same over a quarter or half-year, with an amount against each cause and the lowest point the bank reached, follow the six checks in cash flow analysis for a small business.

A loss in Xero but money in the bank

The same causes work in reverse. The Profit and Loss can show a loss while the bank balance goes up, and that is the riskier of the two, because the cash looks like a cushion when part of it belongs to someone else. Cash rises without any profit when:

• a customer pays a deposit before the work is done (it is owed back as work, not yet income),
• a loan or the owner’s own money comes in (a liability or equity, never income),
• supplier bills are left unpaid (the expense is counted, the cash has not gone yet),
• GST, VAT or PAYE is collected but not yet paid over, or
• depreciation is part of the loss (an expense with no cash going out that month).

Made-up figures for one month in a small building business:

	Amount
Loss for the month (Profit and Loss)	−$4,000
Deposits received for jobs not started yet	+$10,000
Supplier bills owed $6,000 more than at the start of the month	+$6,000
GST collected and not yet paid	+$3,000
Depreciation (in the loss, but no cash went out)	+$1,500
Change in the bank balance	+$16,500

The bank went up by $16,500 in a month that lost $4,000. But $19,000 of that is owed to customers (as work), suppliers and the tax office. Take it off and the business is $2,500 worse off than at the start of the month, which is the real result of trading at a loss. Trace it in Xero the same way as above: compare two Balance Sheets and look for liabilities that went up (deposits or unearned income, Accounts Payable, GST or VAT, loans).

All of this looks back. To see what the balance will be over the next 30 days, from the invoices and bills already in Xero, see Xero short-term cash flow, including the costs it usually leaves out.

What to watch every month

These are the same figures that give early warning of cash flow problems, usually one to three months before a payment is missed.

• Cash today against the end of last month. The single number most owners actually care about.
• Money owed to you that is past due, and by whom. In many service businesses this explains most of the gap between profit and cash.
• Bills and tax coming up against the cash you have. A quarterly GST or VAT payment is the classic surprise; how much to set aside for tax turns it into a share of every deposit.
• How long the cash lasts if it has been falling. A profitable business can still run short if customers pay slowly while it grows. The free cash runway calculator works this out from your cash, monthly costs and income, and shows how much longer the cash lasts if customers pay. To see whether trading itself or equipment, loan repayments and drawings took the cash, the net cash flow calculator splits one period’s money in and out. Cash inflow and outflow examples lists the movements, such as loans, VAT or GST, equipment and drawings, that never reach the profit and loss.
• What you take out yourself. Drawings and dividends come straight out of cash. How much can I pay myself? works out a safe monthly amount from profit, tax and the cash cushion you want to keep, and how many months of cash should a business have? helps you size that cushion.
• How much of the profit became cash, once a year. The cash conversion ratio turns the gap into one percentage, so you can see whether it is getting wider.
• Profit itself, against last month. If it is profit that fell, not just cash, why did my profit drop? shows how to find the cause in Xero, and where is my money going? ranks a year of costs to show where savings are.

Once you know where the cash is tied up, how to improve cash flow in a small business works out what each fix is worth in your own Xero figures, so you start with the biggest.

Common questions

Can a business make a profit and still run out of cash? Yes. Profit counts sales when they are invoiced, so a business that is growing, waiting on slow payers, buying stock or repaying a loan can be profitable on paper while the bank balance falls. This is the most common reason profitable small businesses get into trouble.

Why does Xero show a loss when I have money in the bank? Usually because cash has come in that is not income, or costs have been counted that have not been paid yet: customer deposits, a loan, unpaid supplier bills, GST or VAT not yet paid over, and depreciation. Compare two Balance Sheets; the liabilities that went up show how much of the bank balance is already owed to someone.

Does the profit in Xero include GST or VAT? Not if the business is registered. Sales and expenses on the Profit and Loss are shown without the tax, and the tax collected sits in a liability account until it is paid over. That is why a GST or VAT payment takes cash out without touching profit.

Are owner drawings an expense in Xero? No. Drawings and dividends are coded to equity, so they never reduce profit, but they come straight out of the bank. In the worked example above they are $5,000 of the $25,500 gap. Owner drawings in Xero shows how to record them.

Will switching the Profit and Loss to cash basis make it match the bank? It closes the timing part (unpaid invoices and bills), but not the rest. Loan principal, equipment purchases, tax payments and drawings still do not appear on a cash-basis Profit and Loss, so the bank can still move by a different amount.

How often should I check profit against cash? At least once a month, after the bank is reconciled. If cash is tight or customers pay slowly, a weekly look at money owed to you and bills coming up catches a shortfall while there is still time to act.

Getting this without running the reports

ReportPilot reads your Xero figures and sends a short email every Monday in plain English, leading with the changes that involve the most money that week. It covers the cash in the bank against the end of last month, and roughly how many months it lasts if it has been falling; money owed to you that is past due, with the biggest customers and how many days late they are; and bills due in the next two weeks against your cash. Sales and profit are compared with last month and the same month last year. It asks Xero for read-only access, and there is a 14-day free trial with no card.