Why Your Business Shows a Profit But Your Bank Account Is Low: Understanding Cash Flow vs Profit
Have you ever scratched your head after a good month, wondering why your business is “profitable,” but your bank account still scares you? You’re not alone—it’s a puzzle that stumps many business owners and entrepreneurs across all industries.
Where’s the Money? Profit vs. Cash
Here’s the secret: Profit does not equal cash. Profit is what you see on your financial reports, calculated with accounting rules. Cash is what’s sitting in your account right now, ready to be spent. Just because your books say you’re making money doesn’t mean you actually have that money at your fingertips.
Real-World Business Examples
Contractors & Service Businesses: You might finish a $20,000 renovation and list it as income, boosting your profit numbers. But if your client hasn’t paid yet (or takes 60 days), you won’t see that cash for months—even though your numbers look great.
Retail & Inventory-heavy Businesses: You just bought $30,000 in inventory for your shop. That cash leaves your account instantly, but you only expense it as you sell each item. Meanwhile, your shelves are full and your account is empty!
Restaurants & Local Shops: Large equipment purchases—like a new oven or espresso machine—show up in your cash outflow all at once, but you only get to expense a small “depreciation” piece per month on your profit reports.
Professional Services & Consultants: Someone pays you up front for a year of services. That money hits your account, but you can’t call it all income yet (not until you’ve delivered all the future work); meanwhile, your liabilities increase and cash sits seemingly idle.
Other Common Causes
Loan principal payments: Only interest is on your P&L, but the entire payment reduces cash.
Owner draws: Taking personal money out isn’t a business expense, but it sure eats into cash.
Taxes: You accrue expenses monthly but pay quarterly or yearly, leading to big cash swings.
What Can You Do?
Watch Cash Flow Closely: Your cash flow statement is your new best friend—review it regularly, not just your profit and loss.
Tighten Up Collections: Invoice fast, follow up consistently, and consider requiring deposits.
Manage Inventory: Don’t overstock. Review what’s selling and avoid tying up too much money in slow-moving goods.
Work With a Pro: Having a bookkeeper or advisor on your team—like Price Bookkeeping LLC—can help you anticipate cash shortfalls and put practical systems in place.
Contact Us
Want advice specific to your industry or situation? Reach out for a free consultation. We’re here to help keep your books straight—and your cash flow healthy!