Profit is an opinion about timing. Cash is a fact. Here is where the gap opens up.
It is one of the most common questions we hear, and it rattles owners because it feels like the books must be wrong. Usually they are not. Profit and cash simply answer different questions.
Profit is earned. Cash is collected
Accrual accounting records revenue when you earn it, not when the money lands. A profitable month can be a brutal cash month if customers have not paid yet.
Where the money actually goes
- Receivables: revenue recognized, money still outstanding
- Inventory: cash converted into product sitting on a shelf
- Debt principal: leaves the bank account, never appears on the income statement
- Owner draws and distributions: also invisible on the P&L
- Equipment and build-outs: paid now, expensed slowly through depreciation
- Payroll timing: three-payroll months quietly break the pattern
The diagnostic that usually finds it
Compare net income for a period against the change in your cash balance, then list what explains the difference. That short exercise almost always identifies the culprit, and it is usually receivables or debt principal.
How to stop being surprised
A rolling thirteen-week cash forecast is the standard tool. It shows the squeeze while you still have options, which is the entire point. Options at eight weeks are cheap. Options at eight days are not.
Know what is coming before it arrives, not after it hurts.
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