Cashflow vs Profit: Why Growing Businesses Get Caught Out
Many business owners assume that if their company is profitable, they must be financially healthy. But profit and cashflow are not the same thing. In fact, it’s possible to report a profit while running out of money — one of the most common reasons growing businesses fail.
This article explains the difference between cashflow and profit, why companies often get caught out, and what you can do to avoid financial pitfalls as your business expands.
What Is Profit?
Profit is what’s left after subtracting all expenses from your revenue. It’s an accounting measure and comes in different forms:
Gross Profit: Revenue minus direct costs (e.g., materials, labour directly tied to production).
Operating Profit: Gross profit minus overheads like rent, salaries, and utilities.
Net Profit: Operating profit minus interest, taxes, and other expenses.
Profit shows whether your business is viable in the long run — but it doesn’t tell you if you can pay your bills today.
What Is Cashflow?
Cashflow tracks the actual money moving in and out of your business bank account. It measures liquidity: your ability to meet obligations such as paying suppliers, salaries, and tax.
Types of cash flow include:
Operating cashflow: Cash from day-to-day business activities.
Investing cashflow: Money spent on or received from assets (e.g., equipment).
Financing cashflow: Money from loans, overdrafts, or investor funding.
Cashflow is about timing. Even profitable businesses can face cash shortages if payments come in too slowly or expenses rise unexpectedly.
Key Differences Between Cashflow and Profit
Timing: Profit is calculated when sales are made, but cashflow depends on when money is received.
Non-cash items: Profit includes depreciation and accruals, but cashflow focuses only on actual money.
Sustainability: Profit may look good on paper, but poor cashflow can stop your business from operating.
Why Growing Businesses Get Caught Out
Slow Customer Payments
Invoices may not be paid for 30, 60, or even 90 days.
You could show profit but struggle to pay staff or suppliers in the meantime.
Overtrading
Rapid growth means taking on more orders than your cash reserves can handle.
You pay for stock, labour, or services before customers pay you.
High Upfront Costs
Investing in new premises, equipment, or staff drains cash before the extra revenue arrives.
Seasonality
Seasonal businesses (e.g., retail at Christmas) may see profit concentrated in certain months but cash shortages at quieter times.
Ignoring Tax Obligations
Profits trigger tax liabilities, which must be paid even if the cash isn’t available.
Practical Example
Imagine a construction firm reports a profit of £50,000 on a large contract. However:
Materials cost £20,000 upfront.
Subcontractors were paid £15,000 during the project.
The client pays only 90 days after completion.
On paper, the firm is profitable. In reality, they face a cash gap of £35,000 while waiting for payment — potentially forcing them to borrow or delay other projects.
How to Avoid Cashflow Problems
1. Create a Cashflow Forecast
Regular forecasts (monthly or weekly) help predict when money will leave and when it will arrive. Cloud accounting software makes this easier.
2. Tighten Credit Control
Invoice promptly.
Set clear payment terms.
Use automated reminders for overdue invoices.
Offer discounts for early payment where appropriate.
3. Build a Cash Reserve
Aim to keep at least two to three months of expenses in reserve to cover unexpected shortfalls.
4. Manage Growth Carefully
Don’t overextend. Ensure you have enough working capital before taking on large projects or expanding.
5. Use Financing Wisely
Tools such as overdrafts, invoice financing, or short-term loans can smooth temporary gaps — but they should be managed carefully to avoid long-term debt issues.
Why Monitoring Both Is Essential
Profit tells you whether your business is viable.
Cashflow tells you whether your business can survive today.
A healthy business needs both. Too much focus on profit can hide liquidity problems, while focusing only on cash may prevent long-term investment.
Cashflow and profit are linked but distinct. Profitability alone doesn’t guarantee survival — poor cashflow is one of the top reasons businesses fail, especially in their growth phase. Good management account reporting can help shine insight on this issue.
By understanding the difference, forecasting cash needs, and actively managing payment cycles, you can protect your business from running out of money even when profits look strong.
For growing businesses, the safest approach is to review both profit and cashflow regularly, ideally with the support of an accountant who can highlight issues before they become crises.
