Cash Flow vs. Profit: Why Your Business Needs Both to Survive
Cash Flow vs. Profit: Why Your Business Needs Both to Survive
When you’re running a small business, seeing a healthy profit figure can feel like a win. But if you’ve ever had that number look great on paper while your bank balance is gasping for air, you’re not alone.
Profit and cash flow are two of the most important financial measures for any business — but they’re not the same thing. Understanding the difference (and how they interact) can be the key to making your business not just viable, but sustainable.
What’s the Difference Between Profit and Cash Flow?
Profit is the amount left over once you’ve deducted all your expenses from your income. You’ll find it at the bottom of your Profit and Loss statement (P&L). It tells you whether your business is technically making money over a given period.
Cash flow, on the other hand, is the actual movement of money into and out of your bank account. It shows whether you have enough available cash to pay your bills, wages, tax, and suppliers at any given time.
💡 Example: You invoice a client for £3,000. That income shows up in your accounts, and it looks like you’ve made a tidy profit. But if they don’t pay you for 60 days — and you’ve got rent, tax, and bills to cover in the meantime — you might be struggling for cash.
Why Profit Doesn’t Always Equal a Healthy Business
You can be profitable and still run out of money. That’s because profit doesn’t account for:
Clients who pay late (or not at all)
Large one-off purchases like equipment
VAT bills and Corporation Tax due months later
Stock sitting unsold
Loan repayments
In short: profit tells you how well your business is performing, but cash flow tells you whether it can survive day-to-day.
Why Cash Flow Problems Sink Good Businesses
According to UK government data, poor cash flow is one of the most common reasons small businesses fail — even those that are profitable on paper. You can’t pay staff, suppliers, or tax bills with projected income. You need actual funds in your account.
How to Keep Your Cash Flow Healthy
Here are a few practical ways to keep things flowing:
1. Send invoices promptly
The sooner they go out, the sooner you get paid.
2. Set clear payment terms
Don’t be afraid to shorten terms if it suits your cash cycle better.
3. Chase late payments
A friendly reminder goes a long way — and consistency matters.
4. Put money aside for tax
Use a separate account to ring-fence VAT, Income Tax, or Corporation Tax.
5. Create a simple cash flow forecast
Even a basic spreadsheet can help you see what’s coming in and out over the next few months.
6. Review your outgoings
Check for subscriptions you no longer use, or areas where you can reduce overheads.
Final Thoughts
Profit is important — but if the money isn’t in your account when you need it, profit alone won’t keep your business afloat. Staying on top of your cash position gives you the breathing space to make better decisions and grow with confidence.
If you’d like help reviewing your cash flow or setting up simple systems that work for you, feel free to get in touch.