Ever wondered how a business can be profitable but still run out of money? It’s one of the most common and dangerous misunderstandings I see from business owners, especially in growing SMEs. Cash and profit may sound similar, but confusing them can be fatal to your business’s health.
Understanding the difference isn’t just good accounting, it’s key to survival.
Profit: The Illusion of Success?
Profit is what remains after deducting your business expenses from your revenue. It’s an accounting measure that indicates whether your business is generating a profit on paper.
You’ll see it on your income statement as:
- Gross Profit (Revenue minus Cost of Goods Sold)
- Operating Profit (After running costs)
- Net Profit (After tax, interest, etc.)
Profit tells you whether your business model works.
But here’s the catch: Profit doesn’t pay your bills, cash does.
Cash: The Reality Check
Cash is the money in your bank account today. It’s what pays your staff, your suppliers, and keeps the lights on.
It’s tracked via your cash flow statement, not your profit & loss report.
Here’s the reality:
- You can be profitable but still run out of cash
- You can have plenty of cash but be losing money every month
A Real-World Example:
You make a £20,000 sale today, but the customer won’t pay for 60 days.
✅ Profit goes up now.
❌ Cash doesn’t arrive until months later.
Meanwhile, wages, rent, and suppliers still need to be paid. Without enough cash, you might not survive to collect your profits.
Why This Matters for Business Leaders
- Cash flow issues are the #1 reason businesses fail, not lack of profit
- Profit alone doesn’t guarantee survival or growth
- Smart leaders manage both, not just one
How to Stay on Top of Both
- Monitor cash flow weekly, not just monthly
- Forecast cash needs 3-6 months ahead
- Align customer credit terms with supplier payments
- Build a cash buffer for lean periods
Final Thought
- Profit is an accounting story. Cash is your business’s reality
- Don’t let strong profits blind you to weak cash flow
- If you’re serious about building a resilient, sustainable business, watch both sides of the financial coin
Ready to Strengthen Your Financial Foundations?
Contact a member of the team to discuss, or connect with me on LinkedIn.
