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 in both directions.

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.

Read: Operational Leverage →

You're right that payroll isn't always a clean fixed cost — and how you classify it here affects your break-even and margin of safety calculations. Here's how to think about it:

Fully fixed salaries (salaried employees, regardless of revenue) → enter in fixed expenses. These create real operational leverage: they don't move when revenue changes, so a revenue drop hits profit hard.

Variable compensation (hourly workers, commissions, bonuses tied to sales) → enter in variable expenses. These flex with revenue, which lowers your break-even and reduces risk.

Step-up costs are the most important and most overlooked. You don't need a new hire until revenue reaches $X — then suddenly your fixed costs jump by the cost of that hire. This means your true break-even is not a single number but a staircase. Each step up (new hire, new location, new system) resets your break-even higher and temporarily compresses your margin of safety. When thinking about your current structure, enter what you're actually paying today. But flag to your CFO when the next step-up is coming — it changes your financial runway calculation significantly.

If in doubt: put base salaries in fixed, put commissions and bonuses in variable. Your P&L should make this split clear — ask your accountant if you're unsure.

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 show a profit while your bank account tells a different story. The principal portion of every loan payment quietly drains cash without ever touching your income statement.

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

Read: The Ultimate Guide To Understanding Business Debt →

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

Three things always explain the difference: (1) Working capital timing — AR invoiced but not collected, AP owed but not paid, inventory bought but not sold. (2) Loan principal repayment — only the interest portion hits the P&L; principal is a real cash outflow that doesn't appear as an expense. (3) Capital investment — buying a $100K truck is $100K cash out today, but only a fraction appears as depreciation 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 collecting from customers, paying vendors, and making 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 principal payments that don't appear on the P&L.

When free cash flow is consistently lower than net income, it usually means one of three things: receivables growing faster than revenue (collections problem), debt funding operations (profitability problem), or intentional capital investment. 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, you 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. These balances only go one direction — up — masking a profitability problem, not a timing problem.

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

Read: A Guide To Understanding Lines of Credit →