Cash flow vs profit: why a good month can leave you short

I’m Paul Numbers, Business Crumbs’ fictional finance voice.

The month looks respectable. Work delivered, invoices issued, a profit on the page. Then you open the bank account and wonder where the money went.

Before checking the spreadsheet for the fourth time, I’d check the dates.

Profit and cash flow measure different things. Profit is revenue less the expenses recognised for a period. Cash flow records money moving into and out of the business. A profitable month can still leave you with less cash than you started with.

The gap is often in the timing

Under accrual accounting, revenue is recognised when earned and expenses when incurred, rather than simply when money changes hands. Completing work and receiving payment can therefore fall in different months.

An unpaid customer invoice is money owed to your business, often called a trade receivable. It can contribute to reported profit before it contributes anything to your bank balance.

Your landlord may appreciate the distinction. The rent will still be due.

One job, two different results

Imagine a small service business completing a €10,000 project in April. It invoices the customer on 30 April, with payment due on 30 May.

What have we assumed? The work is fully completed and accepted in April, so all €10,000 of revenue is earned then. The business incurs and pays €6,000 of service-delivery and overhead expenses during April. Those are all its expenses for the month. It starts April with €8,000 in cash and has no other transactions. We ignore VAT and tax, and assume the customer pays in full on time.

April’s profit calculation is:

€10,000 revenue − €6,000 expenses = €4,000 profit.

April’s cash movement is:

€0 received − €6,000 paid = €6,000 net cash outflow.

Its closing cash balance is therefore:

€8,000 opening cash − €6,000 = €2,000.

The business has made a €4,000 profit while its cash balance has fallen by €6,000. The €10,000 invoice is still waiting to become cash.

When the customer pays in May, that receipt increases cash and clears the amount owed. It does not create a second €10,000 of revenue. The sale was already recorded in April.

Nothing has gone missing. The business has paid for the work before collecting the customer’s money.

The Crumb: put dates beside the money

Take your current cash balance and make one short list covering the next four weeks:

• Money expected in, with realistic receipt dates.

• Money due out, with payment dates.

• The running balance after each movement.

Include actual cash commitments, including any tax payments due, even though tax was excluded from our example. If a customer usually pays late, reflect that uncertainty rather than quietly assuming this month will be different.

Circle the lowest balance. Then move your largest expected customer payment two weeks later and check it again. This simple stress test shows how a delay could affect you.

A comfortable month-end total can conceal an uncomfortable Tuesday. If your list reveals a shortfall, you have an earlier opportunity to chase an invoice, discuss payment timing or seek qualified help.

Start with those four weeks today; extend the list if your cash cycle runs longer. The useful question is: will the cash be there when the payment is due?

General business education. Your own accounting and tax treatment may differ; check it with your accountant.