Profit on paper, empty bank account: what's going on

Your P&L can show a profit while your bank account runs low because some of the cash leaving your account, like loan principal, owner draws and big equipment purchases, doesn't show up as an expense on the P&L.

The P&L and the bank answer different questions

The P&L, short for profit and loss, tells you whether the practice earned more than it spent on running costs. The bank balance tells you how much cash you have right now. Often they move together. Sometimes they don't, and that's when owners call me worried.

Things are fine more often than you'd think. The gap usually comes from a short list of places, and you can check each one.

Where the cash went

Loan payments. Each payment on a practice loan is part interest and part principal. Only the interest is an expense on the P&L. The principal pays down what you owe, so it shows up on the Balance Sheet instead. The full payment still leaves your bank.

Owner pay. Depending on how your practice is set up, money you take for yourself may be recorded as a draw or distribution, which isn't a P&L expense. How that's taxed is your CPA's call. For cash purposes, it's money out the door that your profit number doesn't reflect.

Equipment and buildout. A big purchase, like an exam table or office buildout, is often recorded as an asset and spread over several years. Your CPA decides how. The cash left all at once, but the P&L only shows a slice each month.

Inventory. If your books carry meds as inventory, a big restock leaves the bank now but hits the P&L only as it's used. Your CPA decides how it's recorded.

Timing. Annual memberships paid last year may have been spent already. Bills you owe but haven't paid yet make the reverse true. Your membership platform's payout timing can also leave money in transit at month end.

A made-up example

Say your P&L shows $6,000 of profit for the month. During that month you also paid $1,500 in loan principal, took $5,000 in owner draws, and spent $2,000 on a new piece of equipment that was recorded as an asset.

That's $8,500 of cash out that isn't on the P&L. If nothing else changed, subtract that from $6,000 and your bank balance went down by $2,500, even though you made a profit. Nothing's broken. The cash went somewhere real, and every dollar of it is in the books.

What I'd check this week

Open last month's P&L and Balance Sheet side by side, along with your bank statement. Then go down this list:

• How much loan principal did you pay?
• How much did you take as owner pay or draws?
• Did you buy any equipment or pay for buildout?
• Did you buy more meds or supplies than usual?
• Did your accounts payable, meaning bills you owe, go down?
• Was a membership payout still in transit on the last day of the month?

Add up what you find. If it roughly explains the gap between profit and the change in your bank balance, you're in good shape. If it doesn't, ask your bookkeeper for a cash flow statement, which walks from profit to cash line by line.

When it's a real problem

If the gap keeps growing month after month, look at owner pay first. Taking more than the practice earns, after loan payments, drains cash slowly. That's the time to set a pay amount the practice can sustain and to forecast a few months ahead. A cash runway calculator is a good place to start, and I wrote more about how much you can pay yourself.

Common questions

Does showing a profit mean I can take more money out?
Not by itself. Subtract loan principal, planned purchases and a cash cushion first, then decide what's safe to take.

What's a cash flow statement?
It's a report that starts with your profit and adjusts for everything that used or brought in cash without touching the P&L. It's the fastest way to see where cash went.

Is something wrong with my books if profit and cash don't match?
Usually not. Profit and cash measure different things. If the gap can't be explained by loans, owner pay, purchases or timing, then it's worth a closer look.