On a standard world map, Greenland appears to be about the same size as Africa, which is actually fourteen times larger. The Mercator projection isn’t wrong; it was designed for navigation and distorts areas as a trade-off. When it comes to the balance sheet, the situation is even more problematic: there, a part of the world is missing—not distorted, but entirely absent.
A company I advise generated a profit in the low five-figure range over the course of eight months. During the same period, the balance in the business account decreased by approximately CHF 140,000.
Both figures are correct. No receipts are missing, and nothing has been posted incorrectly. The owner asked the obvious question: If we're making a profit, where's the money?
The answer wasn’t in the income statement. It couldn’t have been there anyway. After all, profit isn’t the same as liquidity, and a company’s largest cash flows don’t appear on the income statement—a connection I regularly have to explain to owners of Swiss SMEs, and almost never because someone had done the math wrong.
Key Points at a Glance
- The income statement shows expenses and revenue—not actual payments. Loans, investments, repayments, inventory buildup, and distributions do not appear there.
- In the case described, the money was not spent but lent out: approximately CHF 100,000 as a loan to an investee company, plus an increase in the owner’s checking account balance.
- Two additional patterns account for almost all of the remaining cases: capital tied up in current assets and the processing of advance payments received earlier.
- Anyone who wants to manage liquidity needs to look not only at the income statement but also at changes in the balance sheet—without this, some of the movements remain hidden.
Why the income statement shows only one level
The income statement answers a clearly defined question: How much did the company earn during a given period? To this end, it records revenue and expenses—that is, the decrease and increase in value.
A payment is something else entirely. When a company buys a machine, cash flows out, but no expense is recognized; instead, an asset is created that is depreciated over the years. When it grants a loan, cash flows out without any impact on the income statement—cash is converted into a receivable. When it pays a dividend, cash flows out, and this, too, is not an expense but rather an appropriation of earnings.
All of these transactions are balance sheet transactions. They shift items within the balance sheet or reduce their amounts. They leave no trace in the income statement. So anyone trying to derive liquidity from the income statement is looking in the wrong place.
Three patterns that explain almost all cases
In practice, I see the same three scenarios over and over again—each one with a profit on the books but a strain on the bank account.
The money is borrowed. This is the scenario described at the beginning. Funds flow out of the company as loans to an affiliate, to a related company, or to the owner via the checking account. Formally, this constitutes a receivable and thus remains an asset. What is crucial for solvency is whether and when this money is repaid—and that is precisely what is not reflected in any financial statement but depends on an agreement.
The money is tied up in current assets. The profit is there, but it’s tied up in inventory, work in progress, or balances with payment service providers that pay out only after a delay. A growing company ties up additional capital with every additional franc of revenue. Growth consumes liquidity before it generates it.
The money came in early. This is the opposite scenario—and the one most commonly misunderstood. When you receive advance payments, you have money in your account that you haven’t earned yet. The revenue is recognized in the period when the service is rendered—but there’s no further inflow of cash. Profits rise, the account balance remains flat, and subjectively, it feels as though the business is no longer profitable.
The Bridge from Profit to Account Balance
To get an overview, there is no need for a complete cash flow statement prepared in accordance with accounting standards. A simple reconciliation that starts with net income and adds or subtracts the significant changes in the balance sheet is sufficient:
- Net income for the period as a starting point.
- Plus depreciation —it weighed on earnings, but didn't cost any money.
- Minus the increase in accounts receivable and inventory —this is where funds have been tied up.
- Plus an increase in liabilities —suppliers helped finance this.
- Less investments, loans, and distributions —the items that are not included in the income statement.
The result of this calculation should correspond to the change in the bank balance. If it doesn't, an item is missing—and finding it is usually the most instructive part of the exercise.
Why this is a leadership issue and not an accounting issue
In all these cases, the accounting department is not doing anything wrong. It accurately reflects what has happened, and it does so correctly in accordance with the rules of the Swiss Code of Obligations. The gap only arises when these accurate figures are used to draw management conclusions for which they were not intended.
As a member of the board of directors, I witnessed a board meeting where members discussed the allocation of annual profits even though the cash needed for the planned dividend didn’t actually exist—it was tied up in receivables. The discussion wasn’t conducted incorrectly; it was simply based on the wrong premise. A quick look at the changes in the balance sheet would have ended it in five minutes.
That is why this bridge should be included in every quarterly report, regardless of the company’s size. It is not a tool for times of crisis, but rather a prerequisite for ensuring that profit figures actually guide decision-making.
Conclusion: Two questions, two analyses
“Are we making money?” and “Do we have money?” are two different questions, and they’re answered by two different analyses. Anyone who reads only one of them will eventually have the other one explained to them in an unpleasant way—by the bank, a supplier, or payroll.
This brings us full circle through three analyses that depict the same company in different ways: the timeline in “Accrual Accounting: What the World Map Has to Do with It,” the customer perspective in “Customer Profitability: The Greenland Effect in the Portfolio” —and the balance sheet, which lists the transactions that do not appear in either of the other two.
The effort required to maintain both is minimal. It consists of just a handful of figures per quarter. I describe how to set up and maintain such a liquidity overview on an ongoing basis in the section titled “CFO as a Service.”
Frequently Asked Questions
Why do I have a profit but no money in my account?
Because profit and cash flow are different measures. Investments, loans, distributions, the accumulation of receivables and inventory, and repayments cost money but do not appear on the income statement. The explanation can always be found in the changes to the balance sheet.
How can I identify a liquidity shortfall early on?
Maintain a rolling forecast for the coming weeks that includes expected incoming payments and fixed outflows such as wages, social security contributions, and value-added tax. A shortfall will become apparent there weeks before it appears in the account.
Is the income statement sufficient for corporate management?
No. It shows profitability, not solvency. For management purposes, you also need an overview of changes in the balance sheet and a liquidity forecast—both of which can be derived from the available accounting data.
TF Financial Services integrates day-to-day bookkeeping with financial management at the executive and board levels. If you’d like to have a clear breakdown of the relationship between your company’s profits and its account balance, please get in touch.