Profit is what remains after expenses. Cash flow is the movement of money in and out of your accounts. A business can show a profit and still run short of cash if customers pay slowly or money is tied up in inventory and loans.
1Two different questions
Profit asks whether your income exceeded your costs. Cash flow asks whether you have money in the bank when bills are due. Both matter.
2How a profitable business runs out of cash
- Customers pay slowly while you pay suppliers quickly
- Money is tied up in inventory
- Loan principal payments are not expenses but still use cash
- Large equipment purchases
- Owner draws and taxes due
3How to monitor cash
- Watch your bank balance against upcoming bills
- Review unpaid customer invoices weekly
- Forecast cash for the next 30 to 90 days
- Follow up on late payments quickly
Faster invoicing and a clear payment follow-up routine often improve cash more than cutting costs.
4Use the right reports
The profit and loss shows profit. The balance sheet and a cash view show where cash is tied up. Reading all together gives the full picture.
5Plan ahead
A short forecast each month helps you avoid surprises, such as a tax bill or a slow season. Clean books make that forecast possible.
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