For many founders, the difference between profit and cash flow feels like a technicality, until it becomes a serious problem.
You’re profitable on paper, but the bank account is running dry. Or worse, you’ve got cash in hand but can’t understand why the business is losing money. These situations are more common than you think, especially for small and medium size businesses navigating growth or uncertainty.
In this post, we break down the difference and share what business owners often get wrong and how to fix it.
Profit: What You Earn on Paper
Profit is what’s left after you subtract your total expenses from your total revenue over a given period. It’s what your income statement (also known as the profit and loss statement) shows.
There are several types of profit:
Gross profit = Revenue minus Cost of Goods Sold
Operating profit = Gross Profit minus Operating Expenses
Net profit = What’s left after all expenses, including taxes and interest
However, profit is based on accrual accounting. That means it includes sales you haven’t been paid for yet and expenses you’ve incurred but not paid.
Cash Flow: What’s Actually in the Bank
Cash flow measures how much cash comes into and goes out of your business. It’s tracked via your cash flow statement, not your income statement.
It reflects:
Cash from operations (e.g. customer payments, supplier payments)
Cash from investing (e.g. equipment purchases)
Cash from financing (e.g. loans, investor funding)
You can be profitable and still have negative cash flow, especially if customers pay late, you hold too much inventory, or you’re growing fast without a financing strategy.
The Common Pitfalls
Assuming profit means you can spend freely
A business might report profit but have little usable cash because receivables haven’t come in yet. That “profit” is just on paper.
Neglecting cash flow planning
Many founders budget for revenue and expenses but don’t map out actual cash movements. This creates blind spots that lead to delayed salaries, missed supplier payments, or urgent funding needs.
Overlooking timing mismatches
Paying a supplier today for goods you’ll sell in three months creates a cash gap, one that’s easy to miss if you’re only tracking profit.
A Real-World Example
Let’s say a founder in Melbourne runs a fast-growing retail business. The company reports a $50,000 net profit this quarter, but most sales were made on credit. The supplier had to be paid upfront, and payroll hit just before the holiday rush. The result? The bank account is nearly empty, and so is the founder’s peace of mind.
The business is profitable, but not liquid. Without a short-term loan or better payment terms, it risks defaulting on obligations.
What You Can Do
Track cash flow weekly, not just monthly
Use a cash flow dashboard or spreadsheet to see upcoming inflows and outflows.
Build a buffer
Set aside 2 to 3 months’ worth of expenses to handle dips in cash flow.
Improve receivables
Offer early payment discounts, invoice promptly, and follow up consistently.
Work with an advisor
A good accountant or fractional CFO can help you forecast, model scenarios, and avoid surprises.
Final Word
Profit tells you how your business is performing. Cash flow tells you whether it can survive.
Understanding the difference isn’t just accounting jargon. It’s a key to making smarter decisions, avoiding crises, and building a sustainable business.