The Difference Between Your P&L and Your Balance Sheet
About this episode
“My P&L says I made a profit, so why isn’t that money in the bank?” It’s one of the most common questions home service business owners ask, and the answer lies in how your Profit and Loss report and your Balance Sheet work together.
In this solo episode, Kerry walks through both reports in plain English: what each section means, why net profit isn’t the same as cash, how loan and credit card payments affect each report, and what to watch so you stay out of a cash flow bind. If your financial reports leave you more confused than confident, start here.
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Key takeaways from this episode
- Your P&L covers a period of time; your balance sheet is a snapshot of one moment.
- Net profit is not the same as cash in the bank.
- Only the interest on a loan payment hits your P&L; the principal reduces the loan on your balance sheet.
- Keep your accounts receivable higher than your accounts payable.
- A cash flow forecast shows you what’s coming in and going out before it happens.
- Review your dues and subscriptions regularly: they’re an easy place to save.
Show notes
What your Profit and Loss report shows
Your P&L covers a set period, like a month or a year. It starts with your income, then cost of goods sold (materials and direct labor for most home service businesses), which gives you gross profit. Below that are your overhead expenses, the costs you pay every month whatever your revenue, and at the bottom, the most important number: net profit.
Your balance sheet is a snapshot in time
Kerry compares the balance sheet to a family photo: the moment after it’s taken, something has already changed. As money moves in and out of your bank accounts and credit cards, your balance sheet changes every day.
Assets, liabilities and equity
The top half lists your assets: bank balances, fixed assets like vehicles and equipment, and accounts receivable. The bottom half lists your liabilities, such as credit cards, accounts payable and loans, followed by equity. It has to balance, which is where the name comes from.
Why profit doesn’t equal cash
Using a $1,000 vehicle loan payment as an example, Kerry shows how $750 of principal reduces the loan on the balance sheet while only $250 of interest appears on the P&L. Credit card payments work the same way, which is why $50,000 of net profit won’t mean $50,000 in the bank.
Keeping cash flow healthy
Keep accounts receivable ahead of accou