Cash Flow vs Profit
Profit and cash flow answer different questions about a business and should not be treated as identical.
How the math works
Profit is revenue minus expenses recognized in an accounting period, whether or not cash has actually changed hands. Cash flow is the literal movement of cash in and out — a business can be profitable on paper while running out of cash, if customers haven't paid yet or inventory is tying up funds.
Worked example
A business invoices $80,000 in a month (recognized as revenue) but only collects $55,000 in actual cash, while paying $60,000 in real expenses. It may show a $20,000 profit on paper for the month while cash on hand actually fell by $5,000.
What to watch for
- A profitable business can still fail from a cash-flow crunch if collections lag behind expenses
- Depreciation and other non-cash expenses reduce reported profit without reducing actual cash
- Cash-flow timing (when money is received or paid) matters as much as the total amounts involved
Practical takeaway
Track cash flow and profit as two separate signals — a healthy profit figure doesn't guarantee there's enough actual cash on hand to cover near-term obligations.