Why Is My Net Income Different from My Bank Balance?

Dear Dangerously in Love with Your Finances,

We are a private mental health practice located in Oklahoma City; we specialize in addiction to alcohol and drugs. Every month, as the owner, I review the profit and loss statement — it always shows a large profit. However, when I look at our business bank balance, the numbers tell a different story. Lately, we seem to be at the edge of being short of payroll and have little working capital. I cannot figure out why the profit and loss statement shows profitability, but this isn’t reflected in my bank balance. What is the financial disconnect?

– From Confused about Bank Balance

Dear Confused about Bank Balance,

First, let me applaud you for reading your profit and loss statement. Many business owners do not; they either do not take the time or do not understand what they are reading.

Unfortunately, the profit and loss statement does not tell the entire story of cash movement within your mental health practice. It shows money earned in a specific period — when your mental health practice receives payments from the insurance companies and patients for therapy sessions provided. The profit and loss statement also shows incurred expenses in the same period as the income earned. 

 Your profit and loss statement may be missing some financial transactions, which will not be reflected in your bank balance. These transactions will have a significant impact on your cash:

·               Principal loan payments

·               Purchase of equipment

·               Purchase of a building

·               Any owner’s distribution outside of regular payroll

These financial transactions are located on the Balance Sheet. To monitor the movement– the ins and outs– of the practice’s cash, you also need to review and understand the cash flow statement. 

The Business Profit and Loss Statement, Balance Sheet, and Cash Flow Statement are interdependent of one another. They should be reviewed and understood together, not independently. Together they tell the entire story regarding the cash’s ebb and flow in your mental health private practice.

If you need assistance with understanding your financial statements or any other accounting challenges, please don’t hesitate to contact me. I would love to hear from you.

As always, Stay Dangerously in Love with Your Finances,

Lozelle

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