Cash flow vs. profit: why both matter

01

See how timing creates a difference

Under accrual accounting, a business can recognize revenue before a customer pays and record an expense before paying a supplier. Cash flow records the receipts and payments when they happen. Non-cash expenses, such as depreciation, can also affect profit without a matching payment in that period.

Hypothetical example: a business completes a $10,000 order in April and recognizes it as revenue. Its related expenses for April are $7,000, all paid that month. With no other income or expenses, April profit is $3,000. The customer pays the $10,000 in May, so April cash flow from this order is negative $7,000 and May cash flow from the receipt is positive $10,000. The example isolates one order. The business may have other cash movements in both months.

Accounting methods and circumstances affect when revenue and expenses are recognized. Use your own records and ask an accountant when the treatment is unclear.

02

Build a cash forecast

Start with cash available at the beginning of each week or month. Estimate when customer payments will arrive, then list expected payments and their due dates. Add expected receipts and subtract expected payments to estimate the closing cash balance. Carry that balance into the next period.

Include payroll, supplier payments, rent, taxes, loan payments and planned equipment purchases where applicable. Cash from financing and payments for assets also affect the bank balance even when they do not appear in profit in the same way. Label estimates and keep uncertain receipts separate from confirmed ones.

• Compare actual receipts and payments with the forecast and update dates and amounts.
• Consider a delayed payment scenario and identify the lowest expected cash balance.
• Investigate a projected shortfall early with the people responsible for finance and, where appropriate, an adviser or lender.

03

Review receivables without assuming collection

List unpaid invoices by due date, amount, customer and status. Check whether the invoice is accurate, the work was accepted and a dispute or credit is pending. Assign an owner and next action for each overdue item, following your agreed customer communication procedures.

An outstanding invoice is not cash, and a projected receipt is not guaranteed. Review the profit and loss statement and the cash forecast together, then reconcile them with the bank and accounting records. A forecast supports planning but cannot predict every payment or cost.

• Keep disputed amounts separate from invoices awaiting routine payment.
• Track confirmed receipts separately from amounts expected or under review.
• Seek qualified accounting advice for decisions about your business; this guide is general information.

04

Bridge profit to cash

Begin with the period’s profit and identify timing differences: customers billed but not yet paid, supplier bills recorded but not yet paid, and non-cash expenses. Then inspect cash movements outside operating profit, such as borrowing, loan principal repayments and equipment purchases. Reconcile the resulting change in cash to the opening and closing bank balances. Do not count a loan as sales revenue.