One of the most common questions business owners ask is:“Why doesn’t the money in my bank account match the profit on my accounts?”

If you’ve ever scratched your head over this, you’re not alone. It’s a natural question, and the answer lies in understanding how accounting works. Let’s dive deeper into why this happens, what it means for your business, and how you can stay on top of it.

Cash vs Accrual Accounting – The Core Difference

Your bank account operates on a cash basis: it reflects money when it physically moves in or out. Your accounts, however, usually work on an accrual basis: they record income and expenses when they’re earned or incurred, regardless of when the cash changes hands.

Real-world examples:

  • Payroll and PAYE: If your team earns wages in November, the cost is recorded in November’s accounts. But the actual payment might not leave your bank until mid-December.
  • Sales invoices: If you issue an invoice dated 30 November, it counts as income for November, even if the client pays in late December.

This timing difference means your profit figure and your bank balance will rarely match – and that’s completely normal.

Other Reasons for the Gap

Beyond timing, several factors influence the difference between profit and cash:

  • Accounts receivable: Income you’ve earned but haven’t yet received.
  • Accounts payable: Bills you owe but haven’t paid.
  • Taxes and liabilities: PAYE, VAT, and corporation tax obligations.
  • Prepayments and accruals: Costs or income allocated to the correct period, even if paid later.
  • Fixed assets: Purchases like equipment that don’t hit the profit and loss in the same way as regular expenses.

When you add these up, the gap between your bank balance and reported profit starts to make sense.

Does Profit Equal Cash?

In short: no. Profit measures performance, not liquidity. It tells you how much value your business has generated, not how much cash you have on hand. That’s why understanding both figures – and how they interact – is crucial for good financial management.

Why This Matters for Tax Planning

Here’s where it gets important:Corporation tax is calculated on profit, not cash. If your accounts show a profit of £80,000, that’s the figure HMRC cares about – even if your bank balance is much lower. This is why accurate bookkeeping and timely reconciliations are essential. Missing expense invoices or receipts could mean paying tax on profit you didn’t really make.

How to Get a Clearer Picture

If you want a more accurate view of your finances, consider:

  • Regular management accounts: Monthly or quarterly reports that include timing adjustments, tax estimates, and reconciliations.
  • Balance sheet reviews: Don’t just look at profit and loss – the balance sheet explains where the money is tied up.
  • Cash flow forecasting: Helps you plan for upcoming payments and income.

These steps give you a realistic picture of both profitability and cash position, so you can make informed decisions.

Common Misconceptions

“If I have £50,000 in the bank, I can spend £50,000.”Not necessarily – some of that cash might be earmarked for VAT, PAYE, or supplier invoices.

“Profit means I’m cash-rich.”Not always – you could be profitable but cash-poor if clients are slow to pay.

Final Thoughts

Don’t panic if your bank balance doesn’t match your profit – it’s normal. The key is understanding why and using the right tools to manage both. If you’re unsure where to start, speak to your accountant about management accounts or cash flow planning. It’s an investment that pays off in clarity and confidence.

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