Two clocks
Accrual basis accounting records revenue when it is earned and expenses when they are incurred, whatever the date of payment. Cash basis accounting records both only when money moves. Nearly every business with an outside bookkeeper and a CPA runs accrual, because that is what the tax return, the bank and any buyer want to see. Nearly every owner reads the bank balance, which is cash. So the owner and the books are on different clocks, and the P&L is always describing a slightly different month from the one the account is living through.
The Arkansas Small Business and Technology Development Center gives the cleanest version. A roofer takes a $30,000 job, spends $24,000 on materials and crew, and invoices on completion. The P&L shows a $6,000 profit. The bank is down $24,000 for the 30 to 60 days it takes the customer to pay. Nothing is wrong with the books. The roofer has simply lent the customer $24,000 without calling it that. Timing explains part of the gap, and in a growing business it explains most of it.
The six places profit goes
Invoices you have sent but not collected sit in accounts receivable. When the balance on the A/R Aging Summary is higher at the end of the month than at the start, that increase is profit you have earned and do not have. The QuickBooks 2026 Late Payments Report found 59 percent of small businesses had invoices more than 30 days overdue, with an average of $17,700 owed, so this line is rarely small.
Bills you have paid down faster than you incurred them do the same in reverse. If the A/P Aging Summary fell during the month, you spent cash on last month's costs, and the P&L already counted them.
Loan principal is the largest one owners miss. The P&L shows interest expense. The principal portion of every payment reduces the loan balance on the balance sheet and never appears as a cost, though it leaves the bank every month. Compare the long-term liabilities section of two balance sheets to find it.
Owner draws are money you take out of the business for yourself, outside payroll. In an S corporation or partnership they are distributions; in a single-member LLC they are draws. Either way they are an equity account on the balance sheet, not an expense, and a P&L will show a profit that is already in your personal account.
Equipment and vehicles are capitalized: the truck goes on the balance sheet as an asset and reaches the P&L only as depreciation, a few hundred dollars a month, while the down payment left the account in one piece.
Sales tax payable is money you collected from customers and hold for the state until the remittance date. It arrives in the bank as part of a customer payment and leaves in one lump, usually monthly or quarterly, and it is on neither side of the P&L. The Sales Tax Liability report shows what you owe.
The seventh place, if you own more than one company
Transfers to your other company are the line the generic articles leave out, because they assume one business. If your operating company sends $2,300 to the property LLC to cover a shortfall on the mortgage, or pays a supplier invoice that belongs to your sister company, that money appears as a due from balance on the balance sheet. The operating company's P&L is untouched. Its bank account is not. We see this constantly with owners of two or three entities: the profitable company shows a healthy net income and a thin balance, and the reason is that it has been quietly funding the other one for eighteen months. The same money movement is covered in more detail in how one company paying another's bills gets recorded and cleaned up.
Tracing your own gap in ten minutes
Suppose a June P&L, accrual basis, shows net income of $38,700, while the bank account went from $70,600 on June 1 to $61,400 on June 30, a fall of $9,200. The business is a commercial landscaping company with 31 staff, and the owner wants to know where $47,900 went. Each line below comes from a report the bookkeeper can run today.
| Item | Amount | Where it is in QuickBooks Online |
|---|---|---|
| Net income, June | $38,700 | Profit and Loss, accrual basis |
| Add back depreciation | +$4,100 | Profit and Loss, depreciation line |
| Invoices sent, not yet collected | −$19,400 | A/R Aging Summary, June 30 vs May 31 |
| Bills paid down faster than incurred | −$3,800 | A/P Aging Summary, June 30 vs May 31 |
| Loan principal paid | −$8,900 | Balance Sheet, long-term liabilities, June 30 vs May 31 |
| Owner draws | −$12,000 | Balance Sheet, equity, owner draws or distributions |
| Sales tax remitted in excess of collected | −$5,600 | Sales Tax Liability report |
| Transfer to the property LLC | −$2,300 | Balance Sheet, due from related company |
| Change in bank balance | −$9,200 | Bank statement |
The eight lines add to the $9,200 fall exactly, which is the test that you have found everything. If they do not, the usual culprits are a customer deposit sitting in a liability account, a credit card balance that grew, or an unapplied payment the bookkeeper has not matched to its invoice.
Then look at the $61,400 itself. Of that, $16,300 is a deposit a customer paid in June for an irrigation install happening in August; it sits on the balance sheet as a customer deposit and the work still has to be done. Another $8,200 is sales tax collected and due on the 20th. The cash the owner can actually spend is nearer $36,900.
Which number to run the business on
Common advice is to switch your QuickBooks reports to cash basis so the P&L lines up with the bank. We would rather you did not. A cash-basis P&L hides the invoices you have not collected and the bills you have not paid, which are exactly the things that will decide whether you make payroll in six weeks. Keep the accrual P&L, and learn the bridge above well enough to run it in your head.
The bridge has limits. It tells you where last month's profit went; it cannot tell you where next month's will go, because it works from closed books. The Federal Reserve's 2025 Small Business Credit Survey of 7,653 employer firms found 51 percent had faced uneven cash flows in the prior year, and a 2016 JPMorgan Chase Institute study of 597,000 small firms put the median cash buffer at 27 days. At that margin, the forward view matters more than the explanation, which is what a 13-week cash flow forecast is for, and counting your reserve in days tells you whether 27 is enough for you.
When an owner asks Navigator how much cash the group has, the answer is the total across every account and every company, read from QuickBooks Online that morning, with the amounts that are not really hers called out: a figure like $61,400, with a note that $16,300 is an August customer deposit and $8,200 is sales tax due, each traced to the entry and the company it came from. That is on every plan and it changes nothing in the books.
One more thing the trace cannot do is fix a stale set of books. If the bookkeeper closes six weeks after month end, the June bridge arrives in mid-August. Every report above is only as current as the last reconciliation, so the first question to ask is when that was, and the free accounting health check is one way to find out.
Questions owners ask
Can a profitable business run out of cash?
Yes, and it is common. Profit is recorded when work is invoiced; cash arrives when the customer pays. A business that grows quickly, pays staff and suppliers before it collects, and carries loan principal and owner draws on top can show a profit every month while the account drains. Fast growth is one of the most reliable ways to do it.
Do loan payments show on the P&L?
Only the interest. The principal portion reduces the loan balance on the balance sheet and never touches net income, even though it leaves the bank every month. On a $148,000 truck loan, the P&L might show $700 of interest while $2,900 left the account. Find the principal by comparing the loan balance on two balance sheets.
Is my QuickBooks on cash or accrual basis?
Both, usually. QuickBooks Online stores every transaction with dates that allow either view, and the report header shows which basis you are looking at. Your bookkeeper probably runs accrual for the CPA. If your P&L shows a profit you cannot find, check the header first; then run the same report on the other basis and compare.
Why is my bank balance higher than my profit?
Usually because money in the account is not yours yet or not yours at all: customer deposits for work you have not done, sales tax collected for the state, a loan you just drew, or a payment on an invoice from a prior month. Each shows up on the balance sheet as a liability or a reduction in receivables, not as income.
What is the cash flow statement for?
It is the report that reconciles net income to the change in cash over a period, in three parts: operating, investing and financing. QuickBooks Online builds it from the same transactions as the P&L and balance sheet. It is the right tool for explaining last month. It is not useful for predicting next Friday; that needs a 13-week forecast.
Related
Once the gap is explained, the next question is what it will be next quarter, which is what the 13-week cash flow forecast answers. The receivables line is usually the biggest, and reading the AR aging report forward turns it into a chase list. Contractors have a version of this problem with a name of its own, covered in construction company cash flow problems.
If you want the bridge run for you every morning across all your companies, the trial connects to QuickBooks Online read-only and takes about fifteen minutes: navigatorhq.ai.
Published . Last updated . Reviewed by a CFO on the Navigator team.