Cash Flow vs. Profit: What Small Businesses Often Get Wrong

Many small business owners assume that being profitable means having enough cash — but that’s not always true. Cash flow and profit measure different things, and misunderstanding the difference can lead to financial trouble.

What Is Profit?

Profit = Revenue – Expenses
It’s the money left after costs are subtracted from sales.

But here’s the catch:
Profit does not account for when you actually receive or pay money.

What Is Cash Flow?

Cash flow measures the actual movement of money in and out of your business.

Examples of cash flow:

• Getting paid by customers

• Paying suppliers

• Purchasing inventory

• Loan payments

Why Businesses Can Be Profitable but Broke

• Customers take too long to pay

• Inventory costs consume cash

• Loan payments are high

• Seasonal businesses experience slow periods

You can show a profit on paper but have no cash to pay bills.

Why Cash Flow Is King

Cash flow:

• Keeps your business open

• Lets you pay employees

• Helps you take advantage of opportunities

• Protects you during slow months

How to Improve Cash Flow

• Invoice faster

• Offer online payments

• Shorten payment terms

• Request deposits

• Reduce unnecessary expenses

• Build a cash reserve

Bottom line:
Profit is important, but cash flow keeps your business alive. Monitor both to make strong financial decisions.