Cash vs Profit: Why Every Business Needs to Know the Difference

Have you ever wondered why a business can look successful on paper but still struggle to pay its bills?

The answer lies in understanding the difference between cash and profit—two critical financial concepts that every business owner needs to master.

If you’re unsure what sets them apart or how they impact your business, don’t worry—you’re not alone.

To make it simple, we’ve created a quick explainer video and blog post that breaks it all down.

Let’s dive into the essentials and see how cash and profit affect the health of your business.

The Basics: Cash vs Profit

• Cash is the money you have on hand—either in the bank or in physical form. It’s what you use to pay for rent, supplies, salaries, and daily expenses.

• Profit, on the other hand, is the money left after subtracting all your expenses from your revenue over a specific period. It reflects the overall success of your business.

Here’s the catch, your business can show a profit on paper but still run out of cash, creating serious financial challenges.

A Real-World Example

Let’s imagine you own a furniture store:

1. This month, you sold £50,000 worth of furniture, but £30,000 was sold on credit, meaning your customers will pay in 60 days.

2. That leaves you with just £20,000 in cash from immediate sales.

3. At the same time, you spent £15,000 on materials, rent, and salaries.

On paper, your store made a profit of £35,000 (sales of £50,000 minus £15,000 in costs).But in terms of cash, you only have £5,000 left (cash of £20,000 minus £15,000 in expenses). Now imagine you’re hit with an unexpected bill of £12,000.

Despite being profitable, you’ll face a cash flow crisis because you don’t have enough cash to cover the expense.

Why Cash Flow is Crucial

Cash flow is the day-to-day movement of money in and out of your business. It’s what allows you to cover expenses as they arise. Even a profitable business can struggle or fail without proper cash flow management.

This is why keeping a close eye on cash flow is just as important as tracking your profit.

Cash and Profit: The Perfect Balance

In summary:

• Cash ensures your business runs smoothly day by day.

• Profit shows whether your business is successful in the long term.

You need both to thrive. Understanding how cash and profit work together will help you make smarter decisions, avoid financial pitfalls, and build a stronger business.