Why is my bank balance lower than my profit?

Because profit and cash measure different things. Profit counts sales when you invoice and costs when you are billed. Cash only moves when money is paid. The usual gaps are customers who have not paid yet, stock bought ahead of sales, loan repayments, owner drawings, equipment purchases and tax paid over, none of which reduce profit but all of which take cash.

Can a profitable business run out of cash?

Yes. A business that is growing, gives customers long payment terms or holds a lot of stock can be profitable on paper while the bank balance falls. That is why it is worth knowing how long your cash lasts, not only whether you made a profit.

Where do I find these numbers in Xero?

Profit comes from the Profit and Loss for the period. The changes in money owed to you, bills you owe, stock and loans come from the Balance Sheet run for two dates side by side (the start and end of the period). Drawings and dividends are in equity on the Balance Sheet. Tax paid over is in the GST, VAT or sales tax and income tax liability accounts.

Why are loan repayments not an expense?

When you borrow, the loan is recorded as a liability. Repaying the principal reduces that liability, so only the interest is a cost on the Profit and Loss. The full repayment still leaves the bank.

Why does GST or VAT affect cash but not profit?

Tax you collect from customers was never your income, and tax you pay suppliers is claimed back, so neither is in profit. But the money sits in your bank until you pay it over, so cash looks higher between payments and drops when the return is paid.

How accurate is this?

It is an approximation of the indirect cash flow method, using the figures you enter. It leaves out prepayments and accruals, other balance sheet movements and non-cash items other than depreciation. For GST or VAT it uses the amount paid over and ignores the tax collected during the period, so it can overstate that drain. If you enter what your bank balance actually did, the tool shows how much these figures do not explain.

Is anything I type stored or sent?

No. The calculation runs in your browser. Nothing is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

Profit but no cash? Where did the money go?

Why profit and cash are different

Most accounting software, Xero included, normally reports profit on an accrual basis. A sale counts when you invoice it, not when the customer pays. A cost counts when the bill arrives, not when you pay it. And some payments never touch the Profit and Loss at all: loan principal, owner drawings, equipment, and GST or VAT paid over. So a month can show a healthy profit while the bank balance goes down, and both numbers are right.

How the explainer works

It uses a simplified version of the indirect cash flow method that accountants use for a statement of cash flows. It starts with profit and adjusts for everything that moved cash differently:

Item	Effect on cash
Profit for the period	Start here
Depreciation	Add back: a cost, but not a payment
Customers owe you more	Subtract: earned but not received
You owe suppliers more	Add: costs counted but not yet paid
More stock on hand	Subtract: cash sitting on the shelf
Loan principal repaid, drawings, equipment, tax paid over	Subtract: cash out that profit does not show
New loans or money put in	Add: cash in that is not profit

The result is the change you would expect in the bank balance. Each line is then ranked by size, so the biggest drain is the first thing you see.

A worked example

The same made-up month as in our guide to profit in Xero but no cash in the bank:

	Effect on cash
Profit for the month	+$18,000
Customers owe $12,000 more than at the start of the month	−$12,000
GST paid for the quarter	−$9,000
Owner drawings	−$5,000
Loan principal repaid	−$2,500
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: there is $25,500 less cash than profit, and the largest single reason is the $12,000 customers have not paid yet. That is also the part the owner can do something about this week. Press "Load the worked example" above to see it in the tool.

Finding the figures in Xero

Profit: the Profit and Loss for the period (month, quarter or year).
Balance sheet changes: run the Balance Sheet at the start and end of the same period, side by side. Take the change in Accounts Receivable, Accounts Payable, Inventory and each loan account.
Drawings and dividends: the equity section of the same Balance Sheet.
Tax: the payments to the GST, VAT or sales tax and income tax liability accounts during the period.
Check: the Bank Summary shows the actual opening and closing balances. Enter the difference in "What the bank balance actually did" to see how much the figures explain.

What this leaves out

Prepayments and accruals, such as an annual bill paid up front, or costs accrued but not yet billed.
GST, VAT and sales tax timing. The tool takes the tax paid over. Tax collected during the period sits in the bank until the next return, so if your tax liability went up, cash is higher than these figures suggest. The precise figure is the change in the tax liability account.
Non-cash items other than depreciation, such as provisions, write-offs and unrealised currency gains or losses.
Other balance sheet movements: deposits paid or received, director loan accounts, and asset sales.

If the figures do not explain the change in the bank, the usual reasons are unreconciled bank lines, transfers between your own accounts coded to an expense, and a bank account or credit card that is not in Xero.

For a quarter or half-year, where more of these items come into play, our guide to cash flow analysis for a small business works through six checks on one example, including asset finance, provisional tax and the lowest point the bank reached.

Next: how long does the cash last?

Knowing where the cash went tells you what to fix. Knowing how long what is left will last tells you how urgent it is. The free cash runway calculator works that out from your cash, monthly costs and income, including what changes if your customers pay.

To stop the next squeeze arriving as a surprise, put the known big payments (tax, VAT or GST, loan repayments, drawings, equipment) into a month-by-month plan. Our guide to building a cash flow budget walks through a quarter where the business made a profit but the bank fell to a few hundred at its lowest, and what skipping a dividend and moving one equipment purchase did.

Questions

Why is my bank balance lower than my profit?: Because profit and cash measure different things. Profit counts sales when you invoice and costs when you are billed. Cash only moves when money is paid. The usual gaps are customers who have not paid yet, stock bought ahead of sales, loan repayments, owner drawings, equipment purchases and tax paid over, none of which reduce profit but all of which take cash.
Can a profitable business run out of cash?: Yes. A business that is growing, gives customers long payment terms or holds a lot of stock can be profitable on paper while the bank balance falls. That is why it is worth knowing how long your cash lasts, not only whether you made a profit.
Where do I find these numbers in Xero?: Profit comes from the Profit and Loss for the period. The changes in money owed to you, bills you owe, stock and loans come from the Balance Sheet run for two dates side by side (the start and end of the period). Drawings and dividends are in equity on the Balance Sheet. Tax paid over is in the GST, VAT or sales tax and income tax liability accounts.
Why are loan repayments not an expense?: When you borrow, the loan is recorded as a liability. Repaying the principal reduces that liability, so only the interest is a cost on the Profit and Loss. The full repayment still leaves the bank.
Why does GST or VAT affect cash but not profit?: Tax you collect from customers was never your income, and tax you pay suppliers is claimed back, so neither is in profit. But the money sits in your bank until you pay it over, so cash looks higher between payments and drops when the return is paid.
How accurate is this?: It is an approximation of the indirect cash flow method, using the figures you enter. It leaves out prepayments and accruals, other balance sheet movements and non-cash items other than depreciation. For GST or VAT it uses the amount paid over and ignores the tax collected during the period, so it can overstate that drain. If you enter what your bank balance actually did, the tool shows how much these figures do not explain.
Is anything I type stored or sent?: No. The calculation runs in your browser. Nothing is saved or sent to our server or anyone else. The only exception is if you ask us to email you the result: then your email address and a short summary of the result are stored, and nothing is sent until you confirm.

This explainer gives an estimate from the figures you enter. It is not accounting or financial advice. Xero is a trademark of Xero Limited. This tool and ReportPilot are independent and are not made or endorsed by Xero.

Profit but no cash? See where the money went

Where the cash went