I made money.
Where did it go?

Think of it like a lever. If most of your costs are fixed — rent, salaries, insurance, software — they stay the same whether you have a great month or a slow one. That structure creates leverage.

When revenue grows: Every extra dollar falls almost entirely to profit once fixed costs are covered. Revenue up 20%, profit might jump 50% or more.

When revenue drops: The same math runs in reverse. Revenue down 20%, profit might fall 60% — because fixed costs don't move.

The practical implication: Converting fixed costs to variable — hourly contractors instead of salaried staff, month-to-month leases instead of annual commitments — lowers your break-even and makes you more resilient when revenue is unpredictable.

Every loan payment has two components: interest and principal.

Interest is the cost of borrowing — it shows up on your P&L as an expense, reducing net income. Principal is the repayment of the loan balance itself — it's a cash outflow, but it doesn't show up on your P&L at all. Paying down principal reduces a liability on your balance sheet, not an expense on your income statement.

This is why your P&L can look one way and your bank account can look very different. The principal portion of every loan payment quietly drains cash without ever touching your income statement.

In this tool we estimate the interest portion at approximately 40% of your monthly payments and the principal at 60% — a reasonable assumption for a mid-term business loan. Your accountant can give you the exact split from your amortization schedule.

Your income statement records revenue when you earn it and expenses when you incur them — regardless of when cash actually moves. Your bank account only cares about cash arriving and leaving. These two views of your business will almost never match exactly.

Three things always explain the difference: (1) Working capital timing — AR you've invoiced but not collected, AP you owe but haven't paid, inventory you've bought but not sold. (2) Loan principal repayment — only the interest portion of your payment hits the P&L; the principal portion is a real cash outflow that doesn't appear as an expense. (3) Capital investment — buying equipment is a $100K cash outflow today, but only a fraction appears as depreciation expense each year on the P&L.

The formal document that reconciles profit to cash is the Statement of Cash Flows. If your accountant isn't producing one, you're missing a critical piece of your financial picture.

Free cash flow is what's left after everything real has been paid — not accounting profit, not EBITDA. The actual cash that landed in your bank account after you collected from customers, paid your vendors, and made every loan payment.

It's the number that tells you whether your business is truly generating wealth. A business can show strong net income for years while quietly consuming cash — through growing AR, building inventory, or making loan payments that don't appear on the P&L. Free cash flow cuts through all of that.

When free cash flow is consistently lower than net income, it usually means one of three things: receivables are growing faster than revenue (a collections problem), the business is taking on debt to fund operations (a profitability problem), or the business is making capital investments (which may be intentional and healthy). Knowing which one is the first step to fixing it.

The right use: Bridging a working capital gap. You've done the work, the invoices are real and collectible, you just need a cash bridge until customers pay. The LOC balance rises when cash is tight and falls when collections come in — it cycles.

The wrong use: Covering operating losses. Funding payroll because operations don't generate enough cash. These balances only go in one direction — up — because they're masking a profitability problem, not a timing problem.

The diagnostic test: Is your line of credit balance lower at year-end than at the start? A healthy LOC cycles. One that only grows is telling you something important.