One of the most common sources of confusion for business owners is the gap between profit and cash. You can be profitable on paper and still unable to pay your bills, and understanding why is one of the most useful things you can learn about your own business.
Profit is a calculation, cash is reality
Profit is your income minus your expenses over a period. Cash is what's actually in your bank account right now. They're related, but they move on different timelines, and the gap between them is where a lot of businesses get caught out.
Why they drift apart
You record a sale as income when you invoice it, but the cash doesn't arrive until the client pays, which might be weeks later. You buy stock with cash today that you won't sell for months. You pay tax on profit you earned but haven't collected yet. Each of these opens a gap between the profit on your report and the money in your account.
Why it matters
Businesses don't fail because they run out of profit. They fail because they run out of cash. A healthy profit and loss statement is no comfort if you can't make payroll this week. Watching cash, not just profit, is what keeps you solvent.
What to actually track
Alongside your profit, keep an eye on your cash position and what's coming in and going out over the next month or two. A simple forecast turns nasty surprises into things you saw coming.
The bottom line
Profit tells you whether the business model works. Cash tells you whether you'll survive the month. You need to watch both, and confusing one for the other is a mistake that catches out even growing, profitable businesses.
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