Cash flow vs profit: why your business can be profitable and broke at the same time.
"But we're profitable — how can we be out of cash?"
It's one of the most common and most distressing questions a business owner can ask. The answer is that profit and cash are fundamentally different things, and managing them separately is what keeps a growing business alive.
What profit measures
Profit is the difference between revenue and expenses in a given period, measured on an accrual basis. That last phrase is the key: accrual basis means revenue is recognised when it's earned, not when it's received. Expenses are recognised when they're incurred, not when they're paid.
If you send an invoice in March that your client pays in June, that revenue appears in your March profit. But the cash doesn't arrive until June. Your P&L looks great in March. Your bank account doesn't reflect it.
What cash flow measures
Cash flow tracks the actual movement of money into and out of your bank account. A cash flow statement shows:
Operating cash flow: Cash generated from or used by your core business activities — collections from customers, payments to suppliers, salaries paid.
Investing cash flow: Cash spent on or received from long-term assets — buying equipment, selling property.
Financing cash flow: Cash from or to funders — loan drawdowns, loan repayments, dividends paid, capital injected.
The bottom line of a cash flow statement is the net change in your bank balance over the period. It tells you whether the business is generating or consuming cash — regardless of what the profit figure shows.
Why profitable businesses run out of cash
Several common patterns explain the profit-cash gap:
Debtors who pay late. If your clients take 60 days to pay and you pay your suppliers in 30 days, you're financing a gap every month. As the business grows, that gap grows with it. Fast-growing, profitable businesses are particularly vulnerable to this.
Stock tied up in inventory. Every rand sitting in stock on your shelf is cash that's left your account but not yet returned through a sale. High inventory levels eat cash even while your books show the value as an asset.
Capital expenditure. Buying equipment for R500,000 depletes your cash immediately, but the P&L only sees the depreciation — R100,000 per year for five years. Cash-poor, profit-neutral, until your cash reserves are rebuilt.
Loan repayments. Principal repayments on business loans don't appear as an expense on your P&L (only the interest does), but they are very much a cash outflow. A business making R50,000 per month in profit while repaying R60,000 per month in loan capital is cash-flow negative, every month.
Pre-paid expenses. Annual insurance premiums, upfront software licences, deposit payments — all cash out before the expense period arrives.
The 13-week cash flow forecast
The most practical tool for managing the profit-cash gap is a rolling 13-week cash flow forecast. It models, week by week:
- Expected cash receipts (from known invoices, projected sales, and historical patterns)
- Expected cash payments (salaries, supplier invoices due, SARS payments, loan repayments)
The result is a weekly view of your projected bank balance for the next three months. It doesn't need to be perfect — the value is in seeing the weeks where your balance goes negative before they arrive, with enough time to do something about it.
We prepare and maintain 13-week forecasts for our In Control clients as part of their monthly financial management. The goal is simple: no surprise cash shortfalls.
What to do when you see a cash gap coming
Knowing a cash gap is coming is the advantage. Options available before the crisis are not available during it:
- Tighten debtor collection — follow up on overdue invoices proactively
- Extend creditor payment terms — ask suppliers before the payment is due, not after
- Access a revolving credit facility — if you have one, this is what it's for
- Delay discretionary capital spending
- Have a frank conversation with your banker about a short-term facility
None of these conversations are comfortable. They're all considerably less uncomfortable than the alternative.
The habit to build
Reviewing your cash flow position should be a weekly habit, not a monthly one. Your profit can wait for month-end management accounts. Your cash can't. A simple weekly reconciliation — what came in, what went out, what's the balance, what's due this week — is five minutes of work that can prevent a crisis.
Your accountant should be helping you maintain that visibility. If your financial management is only looking backward, it's not doing enough. Our In Control service is built around exactly this — monthly management accounts, cash flow forecasting, and a quarterly review that keeps you ahead of the numbers, not behind them. You might also find our piece on the 13-week cash flow forecast useful.