Profitable on paper, empty in the bank
A positive P&L doesn't guarantee there's money for payroll. Here's the difference between profit and cash flow, and the four most common causes of the gap.
The Bulb Holdings team ·
It’s one of the most frustrating moments for a business owner: the accountant shows a healthy profit, and that same week there isn’t enough in the account to pay suppliers. The report isn’t wrong. Profit and cash flow simply measure two different things.
What profit measures, and what cash flow measures
Profit is revenue minus expenses for a period. Revenue is recorded when the work is done or the invoice is issued, even if the customer hasn’t paid yet.
Cash flow is the money that actually enters and leaves the bank account. It doesn’t care about invoices, only transfers.
Four common causes of the gap
- Customer credit. When customers pay on 60- or 90-day terms, the revenue is already in the report but the cash arrives months later. The faster you grow, the wider the gap.
- Inventory and deposits. Buying stock or paying a supplier deposit takes cash today, while the expense only shows up when the goods are sold.
- Taxes before collection. Sometimes VAT and tax advances are due on income that hasn’t been collected yet.
- Loans and equipment. Loan principal repayments and large equipment purchases aren’t fully expensed in the P&L, but they leave the bank in full.
How to avoid surprises
A rolling cash-flow forecast. A simple table showing, week by week, the cash expected in and out over the next three months. Update it weekly and you’ll see a shortfall before it arrives.
Track receivables aging. A clear list of who owes what, and since when. An aging debt is a cash problem first and a collections problem second.
Balanced payment terms. If you pay suppliers faster than customers pay you, the business funds the gap itself. A small change in terms can free up a lot of cash.
Arrange bank credit early. Ask for a credit line when things are good, not when you already need it.
Businesses don’t close because they’re unprofitable. They close because they run out of cash. A good cash-flow forecast is the simplest tool to prevent that.
This article is general information and not accounting, tax or legal advice. Review your specific circumstances before making decisions.