Finance
Cash Flow vs Profitability: What Is the Difference?
Learn why a profitable business can still face a cash shortage and why both measures must be monitored together.
Profitability shows whether revenue exceeds expenses over a period. Cash flow shows when money actually enters and leaves the business. The two can move in different directions.
What profitability measures
Profit reflects economic performance under the applicable accounting method. A sale can contribute to profit before the customer has paid the invoice.
What cash flow measures
Cash flow follows actual inflows and outflows: collections, supplier payments, payroll, tax, investment and financing movements.
How a profitable business runs short of cash
Long customer payment terms, early supplier payments, rapid inventory purchases or loan repayments can consume cash even while reported sales remain profitable.
A simple example
If a business records a profitable credit sale today but collects it in 60 days, it may still need to pay wages and suppliers this week. The profit exists on the statement; the cash is not yet available.
Monitor both together
Use profitability to evaluate the business model and cash forecasting to protect payment capacity. Accounts receivable, due dates and planned outflows should be visible in the same decision process.
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