Introduction
The difference between profit and cash is that profit is the revenue left after expenses on paper, while cash is the actual liquid money available in your bank account right now!
It is the most frustrating moment in the life of a small business owner. You sit down with your accountant at the end of the quarter, and they deliver the “good news”: your business is profitable. You’ve had a record-breaking few months, your margins are healthy, and on paper, you’re winning.
Then, you open your banking app. The balance is hovering dangerously close to zero, and you have a payroll run due on Friday.
You ask the question every accountant has heard a thousand times: “If I’m making so much money, where is it?”
As an accountant, I’m here to tell you that profit and cash are not the same thing. In fact, if you don’t understand the difference, your “profitable” business could be headed straight for bankruptcy. Here is the breakdown of why this happens and how to stop the bleed.
The Great Disconnect: Accrual vs. Cash
To understand this mystery, we have to look at how we measure success. Most growing businesses use accrual accounting. This means you record a sale the moment you send an invoice, not necessarily when the client pays you.
If you land a $50,000 contract today, your Profit & Loss (P&L) statement shows $50,000 in revenue. You look like a hero. However, if that client has 60-day payment terms, you have $0 in the bank to pay your rent, your staff, or your suppliers. You are “profitable” by $50,000, but your cash flow is $0.
Profit is an opinion; cash is a fact.
3 Reasons Your Profit Isn’t Reaching Your Bank Account
1. The Accounts Receivable Trap
This is the most common culprit. When you extend credit to customers, you are essentially acting as a bank for them—interest-free. Every dollar sitting in “Accounts Receivable” is a dollar that is recorded as profit but is currently useless for operations. If your sales are growing but your collection process is slow, you can actually grow yourself into a cash crisis.
2. Debt Servicing
Here is a secret the P&L doesn’t tell you: Principal payments on loans are not expenses. When you pay back a business loan, only the interest portion shows up on your profit statement. The actual repayment of the “principal” comes straight out of your cash flow but doesn’t lower your taxable profit. You might show a $5,000 profit for the month, but if you paid $6,000 toward a loan principal, you are effectively down $1,000 in real-world liquidity.
3. Inventory Bloat and CapEx
If you buy $20,000 worth of inventory, that money leaves your bank account immediately. However, it doesn’t show up as an expense on your P&L until you sell the items. Similarly, if you buy a new delivery truck, you might spend $40,000 today, but your accountant will “depreciate” that cost over several years. You feel the $40,000 “hit” today, but your profit statement only reflects a small fraction of that cost this month.
How to Protect Your Business from “Profitable Bankruptcy”
Knowing the problem is half the battle. Solving it requires a shift in how you manage your monthly operations.
Step 1: Monitor Your Statement of Cash Flows
Stop looking exclusively at your P&L. You need to start reviewing your Statement of Cash Flows. This report reconciles the two worlds. It shows you exactly how much cash was generated from operations, how much was spent on assets, and how much went toward debt. It is the “truth-teller” of your financial statements.
Step 2: Tighten the Reins on Receivables
If you are profitable but cash-poor, you likely have a collections problem.
- Request Deposits: Never start a large project without a percentage upfront.
- Shorten Terms: If you’re on Net-30, try moving to Net-15 or “Due on Receipt.”
- Automate Reminders: Don’t let an invoice go five days past due without a polite, automated nudge.
Step 3: Build a Cash Buffer
Try to build a cash buffer for your business. Ideally, this is 3–6 months of operating expenses kept in a high-yield savings account. This buffer acts as a shock absorber for those months where your P&L looks great, but your clients are slow to click “pay.”
The Bottom Line
Profit is the goal, but cash is the fuel. You can drive a car with a destination in mind (profit), but if you run out of gas (cash), you aren’t going anywhere.
Don’t let a “green” profit statement lull you into a false sense of security. Watch your bank balance as closely as your sales charts, and remember: you don’t pay your employees with profit; you pay them with cash. If you’re tired of guessing where your money went every month, it might be time for a professional “Cash Flow Audit.”
A quick heads-up: I love sharing my accounting knowledge to help you grow your business, but please remember that a blog post isn’t a substitute for a real-life sit-down with a pro. Every business is a unique beast, and tax laws change faster than a toddler’s mood. Use this info as a guide, but always double-check with your own CPA or tax advisor before making any big moves. I’d hate for you to make a decision based on general advice that doesn’t quite fit your specific situation!