Profit is revenue minus expenses under an accounting method; cash flow tracks money entering and leaving accounts. A business can report $20,000 of profit after invoicing $100,000 of sales but have only $5,000 of cash if $60,000 of invoices remain unpaid and $35,000 of supplier payments have already left the bank.
What cash flow vs profit means
Profit is an accounting surplus for a period, while cash flow is the movement of cash during that period. Profit margin compares profit with revenue; cash flow asks whether timed receipts and payments leave enough money to meet obligations.
| Recorded revenue | $100,000 |
|---|---|
| Recorded expenses | $80,000 |
| Simplified profit | $20,000 |
| Cash collected | $40,000 |
| Cash paid | $35,000 |
Cash flow vs. profit: how can a profitable business run short of cash?: worked example
A service business records $100,000 of revenue and $80,000 of expenses, producing $20,000 of simplified profit. Customers have paid only $40,000 by period end, while the business paid $35,000 of cash expenses. Cash increased by $5,000, not $20,000. The $60,000 unpaid invoice balance may become cash later, but it cannot pay today's payroll until collected or financed.
How to calculate cash flow vs profit
Build a cash ledger with beginning cash, customer collections, payroll, suppliers, debt service, taxes, equipment purchases, and financing. Separately reconcile revenue and expenses for the same period. Then identify receivables, payables, noncash expenses, and capital spending that explain why the two measures differ.
Use the relevant inputs with these related Calculatort pages: cash runway calculator · profit-margin calculation · break-even units model.
Read the numbers before making a decision
Recorded revenue check 1. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 1 when it examines recorded revenue at $100,000, recorded expenses at $80,000, and simplified profit at $20,000. Identify the unit for recorded revenue in pass 1 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 1, recording the changed recorded revenue makes the result traceable rather than a headline number.
Recorded expenses check 2. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 2 when it examines recorded expenses at $80,000, simplified profit at $20,000, and cash collected at $40,000. Identify the unit for recorded expenses in pass 2 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 2, recording the changed recorded expenses makes the result traceable rather than a headline number.
Simplified profit check 3. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 3 when it examines simplified profit at $20,000, cash collected at $40,000, and cash paid at $35,000. Identify the unit for simplified profit in pass 3 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 3, recording the changed simplified profit makes the result traceable rather than a headline number.
Cash collected check 4. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 4 when it examines cash collected at $40,000, cash paid at $35,000, and recorded revenue at $100,000. Identify the unit for cash collected in pass 4 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 4, recording the changed cash collected makes the result traceable rather than a headline number.
Cash paid check 5. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 5 when it examines cash paid at $35,000, recorded revenue at $100,000, and recorded expenses at $80,000. Identify the unit for cash paid in pass 5 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 5, recording the changed cash paid makes the result traceable rather than a headline number.
Recorded revenue check 6. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 6 when it examines recorded revenue at $100,000, recorded expenses at $80,000, and simplified profit at $20,000. Identify the unit for recorded revenue in pass 6 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 6, recording the changed recorded revenue makes the result traceable rather than a headline number.
Recorded expenses check 7. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 7 when it examines recorded expenses at $80,000, simplified profit at $20,000, and cash collected at $40,000. Identify the unit for recorded expenses in pass 7 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 7, recording the changed recorded expenses makes the result traceable rather than a headline number.
Simplified profit check 8. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 8 when it examines simplified profit at $20,000, cash collected at $40,000, and cash paid at $35,000. Identify the unit for simplified profit in pass 8 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 8, recording the changed simplified profit makes the result traceable rather than a headline number.
Cash collected check 9. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 9 when it examines cash collected at $40,000, cash paid at $35,000, and recorded revenue at $100,000. Identify the unit for cash collected in pass 9 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 9, recording the changed cash collected makes the result traceable rather than a headline number.
Cash paid check 10. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 10 when it examines cash paid at $35,000, recorded revenue at $100,000, and recorded expenses at $80,000. Identify the unit for cash paid in pass 10 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 10, recording the changed cash paid makes the result traceable rather than a headline number.
Recorded revenue check 11. An operating-cash ledger follows the dates customers pay and suppliers must be paid; an accrual surplus does not change the bank balance on its own on pass 11 when it examines recorded revenue at $100,000, recorded expenses at $80,000, and simplified profit at $20,000. Identify the unit for recorded revenue in pass 11 before changing a number: dollars, shares, months, a percentage, or a tax category. In check 11, recording the changed recorded revenue makes the result traceable rather than a headline number.
Common mistakes
Do not treat an invoice as a deposit, omit loan principal because it is not an operating expense, confuse a cash purchase of equipment with a regular expense, or use annual profit to pay a bill due this week.
Where this calculation stops
Accounting policy, accruals, depreciation, taxes, credit availability, seasonality, restricted cash, and collection risk require business-specific records and professional judgment.
Source and verification
The U.S. Small Business Administration explains that cash-flow management tracks money moving into and out of a business and is necessary for meeting obligations. Read the named source. For this illustration, verify the source date and the controlling record for recorded revenue before relying on the result.