Why cash in the bank does not always equal profit

A healthy bank balance can be reassuring, but it does not always mean the business has made a profit. Timing, unpaid bills, VAT, loans and owner drawings can all affect the picture.

Timing matters

Money may arrive before related costs are paid. A bank balance can look strong for a short period even when future obligations are already committed.

VAT and payroll liabilities

Amounts collected or withheld for statutory obligations may sit in the bank before payment. Those amounts should not be treated as available profit.

Loans and owner drawings

Loan receipts increase cash without creating profit. Owner drawings reduce cash without necessarily appearing as an expense in the same way as supplier costs.

Review the records

Quarterly reviews help connect the bank balance to the income statement, balance sheet and business context.

This article is general information for South African business owners and is not accounting, tax, legal or financial advice.