“Profit is an opinion on paper. Cash is a fact in the bank. Here is why the two drift apart, and how to see it coming.”
A founder once told us, "My accountant says we made money. My bank account says otherwise." Both were right.
Profit and cash measure different things. Profit is what you earned on paper, and cash is what you can actually spend today. When the gap between them grows, even a healthy, growing business can run out of money. It is one of the most common ways small companies get into trouble, and one of the most preventable.
Profit is not a cash
Your profit and loss statement records revenue when you earn it and costs when you incur them. Your bank balance only moves when money changes hand.
This business is profitable from day one, yet it has spent $180,000 before it sees a single payment. If it started with $150,000 in the bank, it would run out of cash in month 2, while its reports show a healthy profit.
The Takeaway
A business does not need to lose money to run out of money. It only needs cash to leave faster than it arrives. The fix is rarely dramatic. It comes from watching cash as closely as profit, forecasting a few weeks ahead, and designing your payment terms and spending around the way money really moves.
If you can answer "how much cash will we have in 13 weeks?" with confidence, you are ahead of most businesses.
