Almost every accountant and bookkeeper has had a client say “if my profit is so good,
why don’t I have money in the bank!” Here's a quick explanation about cash flow vs. profit.
The answer is not too complicated. The Profit” on the Profit and loss statement is simply revenue minus expenses. BUT, it doesn’t cover all of the “Cash Out” transactions. For example, if you are paying a truck loan. Only the interest is considered an expense. So if you have 10 truck loans at $800 each per month, that is $8,000 in payments NOT on the Profit and Loss Statement. OR if you are an owner of a company and pay yourself by taking money NOT through payroll, that also does not hit the Profit and Loss. That hits the Balance Sheet (we will touch that in another post)!
● Profit is like your fancy Instagram post after a vacation. You’re showing off the highlight reel: the sunsets, the beach, the perfect meals. It’s that number on your income statement that says, “Look, I made more money than I spent! I’m doing great!”
● Cash Flow, on the other hand, is your real life after the vacation: "Yeah, I have some epic photos, but my wallet’s empty, and I’ve got three missed calls from the credit card company."
Key Differences:
● Profit is what your business says it made
● Cash Flow is what your business actually has in the bank right now.
Why It Matters:
● You can look profitable all day long, but if your cash flow is negative, you’ll be calling up your profit like, "Hey, mind sending me some actual money?" (Spoiler: profit can’t do that— it's just a number on paper.)
● Cash flow is like having actual cash in hand. You can pay the bills, keep the lights on, and afford that second cup of coffee.
So, in short, profit makes you look good on paper, while cash flow determines whether you can buy lunch today. Both are important, but only one keeps the doors open!