Understanding Profit vs. Cash Flow: Why Your Business Can Be Profitable but Still Broke
As a small business owner, it’s easy to assume that if your business is “profitable,” then you must be doing fine financially. But profit and cash flow are not the same—and confusing the two can lead to big problems. Many business owners have looked at a profit-and-loss report that shows strong net income, only to wonder: “If I’m making money, where is it all going?”
In this post, we’ll break down the difference between profit and cash flow, show why both matter, and explain how your business can be profitable but still struggle with cash.
💡 What Is Profit?
Profit—also known as net income—is what’s left over after subtracting all your expenses from your revenue. It’s a measure of how your business is performing on paper, and it’s used to calculate your tax liability.
Formula:
Revenue – Expenses = Profit
Profit is an accounting number. It includes things like:
Non-cash expenses (e.g., depreciation)
Invoiced sales (even if the cash hasn’t come in yet)
Accrued expenses (even if you haven’t paid them yet)
💵 What Is Cash Flow?
Cash flow tells you how much actual money came in and went out of your business bank account during a period. It doesn’t care about invoices or accruals. It cares about when the money moves.
Formula:
Cash In – Cash Out = Cash Flow
Cash flow can be affected by:
Late payments from customers
Loan repayments
Owner draws or distributions
Equipment purchases
⚠️ How You Can Be Profitable but Still Broke
Here are some common reasons:
Slow-paying customers: You booked a sale, but the customer hasn't paid yet.
Inventory purchases: You spent cash to stock up but haven’t sold the inventory.
Loan payments: Principal payments reduce your bank balance but don’t show up on your P&L.
Large capital purchases: Buying new equipment affects cash but not profit in the same way.
Owner withdrawals: Taking cash out of the business doesn’t affect your profit, but it drains your bank account.
✅ What You Should Do
Track both net income and cash flow regularly
Use the statement of cash flows alongside your profit & loss report
Forecast cash needs based on real timing, not just profitability
Consider using accounting software like QuickBooks to get cash flow snapshots