Cash Flow vs Profit: Why You Might Be Making Money but Still Going Broke
You’re selling your products or services. Your income statement shows a profit. But your bank account? Empty. You’re juggling payroll, struggling to pay rent, and wondering where all the money went.
If this sounds familiar, you’re not alone. Many business owners confuse profit with cash flow—two financial metrics that tell very different stories.
Profit vs. Cash Flow: What’s the Difference?
Profit is what’s left over after you subtract your expenses from your revenue. It’s calculated on paper and shown on your income statement.
Cash flow, on the other hand, tracks the actual movement of money into and out of your business. It tells you what’s really available to spend right now.
What many business owners don’t understand is that you can show a profit but still have negative cash flow if your money is tied up in receivables, inventory, or large capital purchases.
Why Businesses Go Broke Despite Being Profitable
Several common issues can create a cash crunch even when you’re technically turning a profit:
High Accounts Receivable
You’re recording revenue, but customers are taking too long to pay. Without timely collections, you don’t have usable cash.
Too Much Inventory
Money tied up in unsold products sits idle. If items go obsolete or need discounting, the financial impact worsens.
Large Capital Purchases
Buying new equipment or vehicles outright drains cash. These purchases might be capitalized (not expensed), so they don’t reduce your profit—but your bank balance feels it.
Debt Repayments
Paying down loan principal doesn’t hit your income statement, but it absolutely affects your cash.
Low Margins or Pricing Issues
Even strong sales can’t save you if you’re underpricing or operating on razor-thin margins.
How to Monitor Both
- Review both your Profit & Loss Statement and Cash Flow Statement monthly.
- Use the Direct Method or Operating Cash Flow analysis to see how cash is generated from your core business.
- Set up cash flow forecasts to anticipate future cash needs and avoid surprises.
Tips to Improve Cash Flow Without Affecting Profit
- Tighten accounts receivable collection policies (consider offering early payment discounts).
- Renegotiate supplier terms to improve payables timing.
- Lease equipment instead of buying it outright.
- Be strategic about inventory purchases—just-in-time models can help.
- Avoid over-hiring or taking on excess overhead too early.
Profit is important for businesses, but cash flow is critical for survival. Understanding the difference between the two—and how to manage both—is crucial to keeping your business alive and thriving.
