A business owner reviews the monthly accounts and sees a profit, yet the bank balance is lower than expected. This is not necessarily an accounting error. Profit and cash flow measure different things.
PROFIT SHOWS PERFORMANCE
Profit generally reflects revenue earned less expenses recognised during a period under the applicable accounting basis. A sale made on credit may contribute to revenue before the customer pays.
CASH FLOW SHOWS MOVEMENT OF MONEY
Cash flow tracks money received and paid. A business may have cash tied up in unpaid invoices or inventory, while loan principal repayments and equipment purchases affect cash in ways that do not match the profit figure for the same period.
WATCH YOUR RECEIVABLES
If customers pay late, the business may struggle to meet payroll or supplier bills despite recording sales. Set clear payment terms, follow up overdue accounts and review credit limits.
PLAN FOR LARGE EXPENSES
Tax payments, annual insurance premiums, equipment purchases and loan instalments can create pressure in particular months. A cash-flow forecast helps anticipate those commitments.
USE BOTH SETS OF INFORMATION
A profit-and-loss statement helps you understand margins and operating performance. A cash-flow forecast helps you anticipate whether funds will be available when payments are due. Together, they provide a more complete view.
Review these numbers regularly with your accountant. The earlier a cash shortage becomes visible, the more time you may have to adjust spending, collections or funding plans.
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