In business, a profit is the money a business earns after accounting for all the expenses. We all know a profit is a good thing and a negative profit (Loss) is bad. In our minds when we see a profit on our financials we believe that amount should be reflected in the checking account. Then realty hits and you realize there is no money in the checking account.

Always remember that profit is not cash and does not reflect what you have in the bank. The income statement reflects the movement of income and expenses for the business within a given period. The net difference is either your profit or loss which is reflected at the bottom of the income statement.

Now let’s take loan payments and how they affect your profit or loss. When you have an outstanding loan the principal is reflected on the balance sheet. The only deduction that a business owner can take from that loan is the interest paid that year. You need to use your cash from the checking account to pay for the loan, but receive a small benefit from the deduction of the interest only portion to the business.