As a business owner, you have probably wondered why your income sometimes says you make more money than you have in the bank. There are many reasons why business profits don’t equal cash and I will be discussing a few of them.

Operations

This is cash received from or used in the business main operations. A well run business main source of cash will be from operations. In running your business, not all sales result in cash collection upfront and not all expenses are paid with cash up front. Also, non-cash expenses like depreciation decrease your income but do not affect your cash flow.

Financing

Businesses often use debt or money from other investors to purchase business assets. Companies can finance operations by issuing stock, borrowing money, etc. These activities are not cash flow from the business operations but receiving them increases your total cash.

In addition, dividends paid to shareholders do not decrease your profitability. Dividends are paid from retained earnings (past income) and does not show up on the income statement as an expense. Dividends paid is a reduction of equity.

Investments

Cash flow from investments is mainly used to ensure that the required assets needed to support efficient operation are acquired and maintained. Investments are made to increase a business’s competitiveness in the market place. When you buy assets, these amounts do not flow to the income statement right away. However, the cash decreases when investments are made.

These are a few reasons why your bank statement gives one number and your income statement gives another. Understanding how these numbers are related is essential to succeeding in business.