Many business owners often confuse profit with cash. Profit is a calculation that subtracts expenses from sales, but it doesn’t reflect what’s actually in your bank account. Cash is what you can spend right now, and it doesn’t always move in sync with profit.
Several reasons can explain why your profit looks good while your cash is low. For example, sales made on credit mean that the money is not in your bank yet. Buying inventory or investing in assets takes up cash, but doesn’t affect your profit immediately. Paying off loans or making personal withdrawals also impacts your cash flow, but not your reported profit. As your business grows, more expenses like rent, stock, and staff can consume your cash.
It’s important to track both cash flow and profit to get the full picture of your financial health. Profit tells you if your business model is working, while cash flow ensures you can survive month-to-month. If you’re not seeing both clearly, you might feel broke even though your business is profitable. Focus on managing cash flow, chasing receivables, and planning growth carefully to avoid confusion and gain control over your finances.
