Short answer: Profit counts sales and expenses when they’re earned or incurred—not when cash moves. Your bank balance only changes when money actually comes in or goes out. The usual culprits: unpaid invoices, bills not yet paid, inventory timing, loan principal, equipment buys, and taxes.
What “profit” really measures (and what it ignores)
On your P&L, profit is accrual‑based: it recognizes revenue and expenses when they happen, not when paid. Some cash outflows don’t hit the P&L as expenses—like loan principal or buying equipment—and some P&L activity doesn’t change cash today—like invoicing a customer who hasn’t paid yet.
Five quick checks to reconcile profit to cash
- Accounts receivable (AR): who still owes you?
- Accounts payable (AP): what bills haven’t you paid yet?
- Inventory timing: cash tied up on shelves.
- Debt & owner distributions: reduce cash, not profit.
- One‑offs & prepaids: annual software, insurance, taxes.
A 2‑minute example
| Item | Cash effect |
|---|---|
| Net profit (from P&L) | + $20,000 |
| AR increased (customers haven’t paid) | − $15,000 |
| AP increased (you haven’t paid vendors) | + $5,000 |
| Loan principal paid | − $5,000 |
| Equipment purchased | − $10,000 |
| Change in cash | − $5,000 |
Do this next
- Open your AR aging; call the top five overdue accounts today.
- List next week’s must‑pay bills (payroll & taxes first).
- Pause non‑essential spend for 14 days.
- If a gap remains, consider deposits, milestone billing, or a short LOC draw.
Key numbers
- Cash buffer: ~1–2 months of expenses.
- Overdue AR: aim < 10% of total AR.
- Inventory turns: improve quarter by quarter.
Make this a weekly habit
Run a quick “Friday cash huddle.” Look at balances, incoming payments, must‑pays, and any big changes week over week. For a deeper refresher on the profit vs cash difference, see Cash Flow vs. Profitability.
FAQ
Does loan principal reduce profit? No. It reduces cash and debt, but not P&L profit. Interest expense does hit the P&L. Why can inventory make cash tight? Cash leaves when you buy inventory, but the expense hits later (when sold). Until then, it’s cash tied up on shelves. Can profit be negative while cash grows? Yes. Delaying vendor payments (AP up) or collecting old AR can raise cash even in a low‑profit month. Don’t rely on this long‑term.
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