Cash Flow Isn't Profit — And Confusing the Two Can Stall Growth

You can be profitable and run out of cash. You can have positive cash flow and be unprofitable. These aren't contradictions—they're the reality of how businesses operate.

Understanding the difference between cash flow and profit is fundamental. Confusing them leads to bad decisions.

The Basic Distinction

Profit is revenue minus expenses, as measured by accounting principles. It's what shows up on your income statement.

Cash flow is money in minus money out, as measured by actual bank account movements. It's what shows up in your bank balance.

These can diverge significantly, especially in growing businesses.

Why They Diverge

Several common scenarios create gaps between profit and cash flow:

Timing differences: You invoice a client in January (revenue), but they pay in March (cash). You're profitable in January, but cash doesn't arrive until March.

Capital expenditures: You buy equipment for $50,000. That's a cash outflow, but it's not an expense—it's an asset that depreciates over time.

Inventory: You buy $20,000 of inventory. Cash goes out, but it's not an expense until you sell it.

Prepaid expenses: You pay $12,000 for annual software. Cash goes out, but the expense is recognized monthly.

Accounts receivable: You've made sales, but customers haven't paid yet. You're profitable, but cash hasn't arrived.

The Growth Trap

This divergence is especially dangerous during growth. Here's a common scenario:

1. You're growing revenue (profit looks good).
2. You're hiring and investing (cash is going out).
3. Customers are paying on net-30 terms (cash is coming in slowly).
4. You're profitable on paper, but your bank account is shrinking.

Many businesses fail not because they're unprofitable, but because they run out of cash during growth.

Managing Both

You need to track both profit and cash flow. They answer different questions:

• Profit: Are we building a sustainable business model?
• Cash flow: Can we pay our bills this month?

The solution isn't choosing one over the other—it's understanding both and managing the gap between them.

Practical Steps

1. Track both metrics: Review your P&L and cash flow statement monthly.
2. Forecast cash flow: Project your cash position 90 days out.
3. Manage timing: Negotiate payment terms that align with your cash needs.
4. Plan for growth: Understand how growth will impact cash before you commit.

Cash flow and profit aren't the same thing. The businesses that understand this distinction make better decisions. The ones that don't often learn the hard way.