Cash Flow vs Profit: Key Differences Every Owner Should Know

In January, you sell $50,000 worth of merchandise, but you allow customers to pay in 30 days. Your expenses for the month, including rent, utilities, and salaries, amount to $30,000. While your profit for January is $20,000 ($50,000 – $30,000), your operating cash flow for January is $0, as you haven’t received any money yet. A cash flow statement is a financial statement that shows the cash going in and out of a business over a set period. It’s crucial to understand the different levels of profit to get an accurate picture of your business’s health.

Often, even the most profitable, successful companies are no strangers to intermittent periods of negative cash flow. For instance, they may need to spend a large sum of money paying back a loan or purchasing an expensive piece of equipment. The key is not allowing these brief periods of decreased cash flow to continue for a long period. Profit represents the difference between your business’s total revenue and total expenses over a given period. It’s often referred to as the “bottom line” because it shows whether your business is making money after covering all costs and expenses. Profit provides insights into your business’s profitability, but it does not necessarily reflect your company’s liquidity.

However, as you become more familiar with the language of financial statements it may become easier to make sense of them. You could search online for cash flow statement examples from companies you might invest in. They are generally available on a company’s investor relations website and through the website of the US Securities and Exchange Commission. You generally read a statement of cash flows from top to bottom, adding or subtracting for each line item to arrive at a total inflow or outflow for each of the categories of cash flows. There can be times when a business is profitable but can still have a negative cash flow.

What is Profit Optimization + Tips for Ecommerce Growth

Conversely, a utility bill for December’s services is recorded as an expense in December, even if the payment is made in January. This approach provides a comprehensive view of a company’s financial performance by matching revenues to the expenses that generated them within the same accounting period. Profit is displayed on a company’s income statement, also known as the profit and loss (P&L) statement. To gain a more complete picture of the company’s financial health, you should also look at the balance sheet and income statement, and even consider tracking these over time. Looking at a company’s financial statements and comparing them against the statements of competitors or peers in the same industry can help provide further context.

Shopify Fees Calculator: What You’ll Actually Pay in 2025

Cash flow forecasting provides a snapshot of your business’ future liquidity, allowing you to better predict cash shortfalls, invest expected surpluses and ensure you can honour debts. This liquidity ratio indicates how effective your business is at generating cash from its daily operations. A higher ratio suggests your operations are healthy and generating enough cash to sustain the business. Before you start making early payments on a loan, check if there are prepayment penalties.

Although it might sound like an income statement covers the same material as a cash flow statement, a company’s profits and its cash inflows can actually look different. That sale would show up as revenue and contribute to profits on the income statement, but might not translate into a cash inflow until a later period. The cash flow statement is where you can outline all of your cash inflows and outflows over a specific period, providing insights into your liquidity and short-term financial stability.

Strong cash flow management gives you peace of mind and flexibility. It means you can jump on opportunities like bulk discounts or equipment upgrades without scrambling for financing. Manual spreadsheets are prone to mistakes in data entry, formulas, and misclassifications, which distort financial health insights. A profitable business can struggle if your revenue is tied up in unpaid invoices. If not properly managed, these higher financing the difference between cash flow and profit costs and cash flow strain could weaken credit, hurt supplier relationships, and threaten business stability. Cash flow refers to the net change in your business’s cash position over a specific timeframe.

• Profits won’t help a business if they are not preserved or spent wisely.
• For example, you can deduct a portion of your vehicle expenses if you use it for business purposes.
• While profit shows how much money you’re making on paper, cash flow reflects the actual movement of money in and out of your business.

How to Switch Accountants: A 5-Step Guide for Small Business Owners

Any company we affiliate with has been fully reviewed and selected for their quality of service or product. If you’re interested in learning specifically which companies we receive compensation from, you can check out our Affiliates Page. View the video below to see how you can easily build a cash flow forecast in Fathom. Whether it’s taking on new staff or purchasing equipment, Fathom makes it easy to see the financial impact of new initiatives. This involves estimating how much your business will sell and when by analysing historic sales figures and examining current pipeline opportunities.

How to Calculate Operating Cash Flow (With Example)

• Cash flow is essential for the day-to-day operations of a business.
• As it’s the final step in determining your ‘real’ profit it is also called the bottom line.
• Luckily, there are different cash flow formulas to help small businesses monitor how money moves in and out as they go about their day-to-day operations.
• Conversely, a business might experience negative profit due to large upfront investments, such as purchasing new equipment or expanding facilities, yet maintain healthy cash flow.
• Profit is the money left over after all your expenses are subtracted from revenue.

The critical difference between business cash flow vs. profit is time. Another prime example of cash flow positivity and profitability not going hand-in-hand is when a business uses loans or investments to fund growth and expansion. The process of expanding your business will surely decrease profitability, but receiving a loan or investments from shareholders could help you maintain positive cash flow. For instance, a company might have had a highly profitable year but simultaneously struggled with cash flow due to slow-paying customers. Conversely, a business could have strong cash flow but eventual minimal profitability due to heavy ongoing expenses that have yet to be accounted for.

For example, if you extend credit to customers, you recognize the revenue (and profit) when the sale is made, but the cash comes later. Similarly, large capital expenditures can impact cash flow in the short term, even though they may boost profitability in the long run. Understanding these timing differences is key to effective cash flow analysis and financial management. Accurate cash flow forecasting is essential for identifying and managing potential gaps in a business’s finances.

How technology can enhance cash flow analysis

Maybe the problem isn’t that Tex has an addiction to glittery cowboy hats—maybe it’s that he didn’t forecast his clients not paying immediately. A big chunk of his cash flow—$7,000, out of a total cash flow of $13,000—came from Increase in Accounts Payable. Looking back at his transaction records, he sees he hired a bunch of contract workers to run mechanical bulls at a three-day “indoor rodeo” event. Here’s what Tex can do with his statements in order to manage cash flow. For instance, “Accounts Receivable” is where you track the money owed to you.

A positive cash flow means a business can meet its financial obligations, while negative cash flow can lead to financial distress. Yet another issue impacting cash flows is rapidly increasing sales. A major problem for rapidly-growing firms is that they extend credit to customers, which delays cash receipts, while having to pay suppliers at a more rapid clip.

Another common misinterpretation is overlooking the timing of cash flows. For instance, a business may appear to have healthy cash flow due to a large inflow from a loan, masking underlying operational cash flow issues. Financial stability and solvency are assessed through debt management and investment capacity. Ensuring sufficient cash to meet debt obligations reduces default risk, while positive cash flow supports business reinvestment and growth. Operational efficiency is gauged by examining cash flow from operating activities.

Focusing on profit, not liquidity

When a business has cash, its actions are far less constrained than those of a business with little or no cash. Operating cash flow covers transactions related to your business’ primary operations. It is calculated by taking cash from customers, dividends, or interest payments and subtracting operational expenses such as rent, salaries, or supplies.

Sales can be used to inject cash into your business now and get rid of a surplus of product, solving two problems at once. Luckily, there are steps you can take to increase liquidity and overcome any cash shortfalls. The problem is, even if Tex has $7,000 worth of cowboy hats sitting in his garage, that’s $7,000 that he can no longer spend. And even though he’s got $8,000 in Accounts Receivable, he hasn’t been paid yet. Because accrual accounting is more of a long-term, big-picture way of understanding your finances.

It also allows a business to easily see how its profitability changes over time. For instance, if your profit margin is 10% one year, and 17% the next, your profitability is improving. Fathom brings to life cash flow forecasting with visualisations driven by comprehensive financial modelling. You can forecast up to five years into the future or set up rolling live forecasts that update as often as your financials.