Profit vs. Cash Flow: The Key Difference That Could Save Your Business

Your business can look great on paper and still run into money trouble. The reason? Profit and cash flow are not the same thing.

Whether your books are on cash basis or accrual basis, understanding how your profit and loss (P&L) statement compares to your cash flow is essential to avoiding surprises.

Let’s break it down.

Cash Basis P&L vs. Cash Flow

Cash basis accounting records income when money actually comes in and expenses when they’re paid. This makes it feel like your P&L is telling the whole cash story — but it’s not.

Even on cash basis, your P&L doesn’t show every activity that affects your bank balance. Examples:

• Paying down a loan – Only the interest hits the P&L; the principal reduces cash but not profit.

• Owner draws/distributions – Cash outflow that isn’t an expense.

• Owner contributions – Adds cash but isn’t revenue.

• Buying equipment in cash – Reduces your bank balance but isn’t recorded as an expense.
  

Example: Your P&L shows a $10,000 profit for the month. But you also made a $7,000 loan payment (principal) and took a $3,000 draw. Your cash flow for the month is actually zero.

Accrual Basis P&L vs. Cash Flow

Accrual basis accounting records income when it’s earned and expenses when they’re incurred, regardless of when cash moves.

This can create an even bigger gap between profit and cash flow. Examples:

• You issue a $50,000 invoice today — it shows up as revenue now, but you won’t get paid for 60 days.

• You receive a $20,000 supplier bill — it shows as an expense now, but you don’t pay it until next month.

• Inventory purchases tie up cash immediately, but the cost isn’t recognized until you sell the items.

Example: Your P&L shows a $25,000 profit because you landed a big contract. But if most of that revenue is unpaid and payroll is due this week, you could face a cash shortage despite the “profit.”

Why This Matters

• Cash basis can give you a false sense of security if you ignore big cash movements outside your P&L.

• Accrual basis can make you feel richer or poorer than you really are, depending on timing of payments.

In both cases, cash flow tells you the real-time truth about your ability to meet obligations.

How to Protect Your Business

• Review your P&L regularly to track profitability trends.

• Monitor your cash flow statement to know your actual liquidity.

• Use cash flow forecasting to spot shortfalls before they happen.

Profit is your scoreboard. Cash flow is your fuel tank. Without both in balance, your business can stall unexpectedly.

Not sure where you stand? We offer a free cash flow review to help you see the full picture — so you can make decisions with clarity and confidence.