Cash Flow vs Profit - Why Your Business Looks Profitable on Paper but Has No Cash

Disclaimer: This content is educational and does not constitute legal, tax, or investment advice. For decisions related to your business finances, consult your accountant or advisor.

Cash flow vs profit - the difference that decides whether a business survives

Profit and cash flow answer two different questions.

Profit tells you whether the business is economically viable in a given period - how much the company earned after subtracting costs from revenue, according to accounting rules. It matters because it shows whether the model makes sense.

Cash flow is more practical: whether the business has money to pay obligations on time. Whether you can pay payroll, taxes, social security contributions, leasing instalments, and suppliers when the due date arrives.

This is the core issue: you can have profit and still have an empty bank account. It is a common scenario in SMEs, especially in B2B and in fast growing businesses.

The simplest rule to remember:

• profit shows the result
• cash flow decides whether you survive the next few weeks

Profit vs cash flow - quick comparison

Where "profit on paper" and an empty account come from

This is not an accounting error and it is not automatic proof of poor management. Most often it is the cash cycle - the gap between when you sell and when you actually receive money.

Below are four mechanisms that create the biggest differences in practice.

Issued invoices are not money in the bank

In accounting, revenue often "happens" when an invoice is issued or a service is delivered. In cash flow, a sale happens only when money hits your account.

If you invoice with 30, 45, or 60 day terms, you create a natural timing gap. If customers pay late, the gap grows.

In practice:

• you sell today, so revenue appears in reports
• cash arrives weeks later
• many costs are paid immediately or monthly

That is why growing revenue does not always mean a growing bank balance.

Inventory, deposits, and VAT can consume cash

In many businesses, money turns into stock, materials, or labour before it returns through sales.

Examples:

• an e-commerce store stocks up before the season
• a manufacturer buys materials and pays energy before finished goods are sold
• a services business pays subcontractors before the client pays the invoice

Add VAT and taxes, which can be significant cash outflows even when the reported result looks good.

The outcome is straightforward: part of your money is locked in inventory, deposits, or receivables instead of sitting in your bank account.

Fixed costs are due every month, regardless of inflows

Businesses rarely fail because of one big expense. More often they fail because recurring obligations arrive on schedule, regardless of whether customers paid.

Most commonly:

• payroll and social security contributions
• rent, utilities, leasing
• subscriptions, tools, accounting
• instalments and supplier payables

When inflows are delayed but costs are rigid and cyclical, cash flow tightens even with positive profit.

Growth often makes liquidity worse

This is one of the least intuitive parts.

When a business grows, sales increase, but so do:

• receivables (more sales on terms)
• inventory (to deliver bigger demand)
• operating costs (people, logistics, marketing)

A company can look more profitable on paper while becoming more cash constrained. This is the classic moment when profit does not translate into liquidity.

Accrual vs cash - simple explanation without accounting jargon

Two perspectives help make this clear.

Accrual accounting looks at when revenue and costs are earned or incurred, regardless of whether money moved. In short: the fact of a sale and the fact of an expense.

Cash accounting looks at transfers: what actually came in and what actually went out in a given period.

Mini example:

• on March 5 you deliver a service and issue an invoice for 20,000 with 30 day terms
• that same week you pay 8,000 to subcontractors and 6,000 in fixed costs
• reports show revenue and it looks like things are fine
• but cash left now, and the inflow arrives in April

That is the difference behind the feeling: "the business earns, but the account is empty".

The most common cash flow gaps in SMEs

If you want to diagnose the issue fast, start with these four areas.

Receivables

• long payment terms and late payments
• no reminder process or soft collection steps
• overdependence on one key customer
• no credit limits and no rule for pausing work when overdue

Payables

• no payment calendar and prioritisation
• paying "at the last minute" without planning inflows
• fixed costs that are hard to reduce quickly

Taxes and VAT

• no tax buffer
• treating VAT as "company money"
• surprises during growth, when VAT due increases faster than the bank balance

Investments and growth

• hiring and marketing without calculating when growth turns into cash
• stocking up without a "worse season" scenario
• funding growth with a structure that is repaid faster than cash returns

How to close the gap between profit and cash - 8 practices

These steps do not require a business rebuild. In most SMEs, they create the biggest improvements.

1) Build a simple 13-week cash flow forecast

This is the simplest early warning system. You do not need a complex model. You need:

• expected inflows (by dates and realistic collectability)
• expected outflows (fixed and variable)
• weekly net balance

If you see a gap three weeks ahead, you can act early instead of reacting in panic.

2) Create a payments calendar and prioritise obligations

Not all payments are equal. Structuring payables helps you protect operations when inflows slip.

Minimum:

• list of recurring payments and dates
• list of variable obligations
• prioritisation rules for tight weeks

3) Automate invoice monitoring and reminders

In many companies the issue is not sales. It is lack of control over receivables.

A simple process:

• reminder before due date
• reminder on the due date
• soft collection after 7 days
• clear escalation after 14 and 30 days

4) Introduce deposits and milestone billing

For projects, services, or production, deposits and staged payments can dramatically improve cash flow.

It can be a standard:

• start - deposit
• milestone 1 - partial payment
• completion - final payment

5) Build a buffer for taxes and VAT

The simplest method is to separate these funds from operating cash: a dedicated account, a sub-account, or a fixed reserve set aside after each customer payment. VAT and income tax are liabilities with specific due dates. If you spend that money on day-to-day operations, a liquidity gap shows up when taxes fall due - even if sales are growing.

6) Reduce DSO - the time you wait to get paid

Often it is a mix of:

• shorter terms for new customers
• discount for early payment
• credit limits and a "next delivery after payment" rule
• consistent reminders

In services, deposits help a lot.

7) Review fixed costs and flexibility

Identify the monthly costs that keep pulling cash and ask:

• what can be renegotiated
• what can be moved to variable pricing
• where you pay regardless of inflows

8) Fund growth with a structure that matches your inflow cycle

If cash comes back to your business in 30-60 days, but repayments start much earlier, liquidity pressure builds fast. In practice, the company grows, yet cash cannot keep up because instalments come due before customer payments arrive.

Good financing does not force the cycle to speed up. It stabilises cash flow: the total cost is clear in currency, the schedule matches real inflows, and the rules for a bad month are defined upfront.

To compare offers without falling into a cost spiral, also see: Alternative to bank loans for businesses - how to choose financing without a cost spiral and Business financing glossary - contract terms and questions to ask in meetings.

Mini case studies - what it looks like in practice

Case 1 - a B2B services company: growing sales, tight bank balance

The company kept winning more customers. Reports looked strong: revenue rose, costs were under control, and profit was positive. The issue was timing. Invoices had 30 to 60 day terms and some customers paid late.

At the same time, the company had monthly fixed costs: payroll, contributions, tools, and subcontractors. Cash left faster than it returned.

What worked:

• a 13-week cash flow forecast to see gaps early
• invoice reminders and soft collection
• milestone billing and deposits for larger projects

Result: growth continued, but without last minute payment firefighting.

Case 2 - e-commerce before peak season: profit up, cash down

Before peak season, the business stocked inventory and increased marketing budgets. Sales climbed and margins looked fine, so profit "on paper" was healthy.

In reality, most cash was spent earlier: stock, logistics, and ads. Inflows returned gradually, while fixed costs and taxes kept coming due.

What worked:

• splitting inventory and marketing spend by weeks, not all at once
• a tax buffer and separate VAT handling
• a payables plan with clear priorities

Result: the season stopped being a risk of strong sales with weak liquidity.

Summary - liquidity vs profit: what to control in practice

Profit tells you whether the business model works. Cash flow tells you whether the business can operate today.

If sales rise while the bank account feels tighter, the issue is usually the cash cycle: inflows arrive later than outflows.

The good news is that most cases can be improved without a revolution. Start with a 13-week forecast, receivables control, payables planning, and a tax buffer. If you use financing, choose a structure that is repayable in the rhythm of your inflows, not in the rhythm of a provider spreadsheet.

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