Profit and cash flow are not the same thing
Profit is the amount remaining after business income and expenses are accounted for.
Cash flow measures the actual money entering and leaving the business.
A business can report a profit without having enough cash to pay its immediate expenses.
This is one of the most important financial concepts every business owner should understand.
Example: A profitable business with no cash
A construction company completes a project worth R100,000.
Its direct and operating costs for the project are R70,000.
| Description | Amount |
|---|---|
| Project revenue | R100,000 |
| Project expenses | R70,000 |
| Profit before other applicable items | R30,000 |
The customer has 90-day payment terms.
The company has earned a profit in accounting terms, but it has already spent R70,000.
If it does not have sufficient cash reserves, it may struggle to pay suppliers and employees while waiting for the customer.
Three reasons the cash gap develops
1. Customers pay after delivery
The business records revenue and profit, but the cash arrives weeks or months later.
2. Stock and materials consume cash
A retailer may purchase R100,000 of stock before selling it. The money leaves the bank immediately, but revenue is only generated when the stock is sold.
3. Non-cash accounting expenses
Depreciation reduces accounting profit but does not represent a current cash payment. This is one reason profit and operating cash flow differ.
Other differences can arise from loan principal repayments, capital expenditure, tax payments and changes in inventory or receivables.
Understanding three important financial reports
Income statement
Shows revenue, costs and profit over a period.
It answers: Is the business generating a profit?
Cash-flow statement
Shows cash generated and used by operating, investing and financing activities.
It answers: Where did the money come from, and where did it go?
Balance sheet
Shows assets, liabilities and equity at a particular date.
It answers: What does the business own, what does it owe and what is left for its owners?
All three reports are important. None should be used as a substitute for the others.
How to manage profit and cash together
- Review cash balances weekly.
- Review profit and expenses monthly.
- Monitor unpaid customer invoices.
- Monitor stock levels.
- Record all business expenses.
- Separate business and personal transactions.
- Prepare forecasts for large purchases and projects.
- Set aside money for tax and other obligations.
What if your business makes sales but the bank balance keeps falling?
Investigate the following:
- Are customers paying later than expected?
- Are you purchasing too much stock?
- Are operating expenses increasing?
- Are loan repayments consuming cash?
- Are you taking more money out of the business than it can afford?
- Are you accepting projects that require substantial upfront expenditure?
- Are your selling prices high enough to cover the true cost of delivery?
The answer may not be to increase sales. It may be to improve collections, reduce costs or change payment terms.
Frequently asked questions
Yes. It may have received a loan, owner contribution or customer deposit. Cash availability does not automatically mean the business is profitable.
No. It may have unpaid invoices, inventory purchases or significant capital expenditure.
Monitor cash flow at least weekly and review profitability monthly. Both are essential.
Under accrual accounting, revenue may be recognised when earned rather than when cash is received, subject to the applicable accounting framework.
Can a business have cash but make a loss?
Does a profitable business always have positive cash flow?
Which should I monitor more often?
Why do accountants record sales before receiving payment?
Your next action
Compare your latest income statement with your current bank balance. Identify how much of your reported revenue is still owed by customers and how much cash is already committed to expenses.