Cash Flow vs Profit: Why Your Business Needs Both

Most small business owners keep an eye on their profit and loss, but far too many ignore the one thing that keeps the lights on.

You might see a profit on your books and feel like you’re flying. But if the money hasn’t actually hit your bank account, you’re still grounded.

This is the mistake we see all the time: confusing profit with cash flow.

It's one of the most common reasons small businesses go under, not because they weren’t profitable, but because they ran out of cash.

Let’s fix that today.

Why Confusing Profit and Cash Flow is Dangerous

Imagine this: You’ve had a busy few months. Sales are up. You’ve issued invoices worth £50,000 and your accountant says you’ve made a profit of £20,000. So you decide to invest in a new team member or upgrade your equipment.

But here’s the catch…

• Only £15,000 of those invoices have actually been paid.

  
  

• VAT and payroll are due next week.

  
  

• You’ve already spent £5,000 on marketing.

  
  

Suddenly, you’ve got more promises than pounds.

This is how businesses that “look good on paper” find themselves unable to pay suppliers, staff, or even themselves. It’s not about profitability, it’s about liquidity.

Breaking It Down: Profit vs Cash Flow

Let’s make this painfully clear:

Profit is:

• What’s left after income minus expenses, whether you’ve been paid or not.

  
  

• Calculated using accrual accounting (revenue is recognised when earned).

  
  

• Useful for understanding long-term business performance.

  
  

Cash Flow is:

• The actual movement of money in and out of your bank account.

  
  

• Tracks when payments land (and leave).

  
  

• Essential for day-to-day survival and short-term planning.

A Real-World Example: The Hidden Danger

Let’s take a construction or engineering firm that wins a £500,000 project, spread across 6 months.

On the profit & loss (P&L), it looks great:

• Contract value: £500,000

  
  

• Estimated total costs: £350,000

  
  

• Projected profit: £150,000

  
  

• From an accounting perspective, everything looks on track.

But Here’s the Cash Flow Story:

• Stage payments are delayed — client is slow with paperwork

  
  

• Work in Progress (WIP): £180,000 of costs already incurred but not yet invoiced - Short term future payments you need to budget for.

  
  

• £50,000 is held back as a retention (you won’t see it until project sign-off)

  
  

• £30,000 is currently sitting in stock and site materials

  
  

• You’ve paid £70,000 in subcontractor labour upfront

  
  

• VAT and PAYE of £40,000 is due next month — before you get paid

  
  

You’re profitable on paper.

But you’ve got £240,000 locked up in unpaid work and upfront costs 

Cash in the bank? Around £25,000 maybe less once wages go out

The Implications

1. You're Cash-Trapped

Despite showing a £150k profit, you can’t pay your next supplier invoice or fund materials for a new job. Growth is paused.

2. WIP = Risk

If the client delays or disputes the work, that £180,000 in WIP becomes a liability, not an asset. You're exposed without leverage.

3. Can't Fund New Projects

With cash tied up in this job, you can’t tender or start the next one. That creates revenue gaps, delays growth, and affects staff planning.

4. Rising Pressure on Profitability

To keep going, you:

• Delay investment in systems or training

  
  

• Stretch supplier terms, risking relationships

  
  

• Dip into overdrafts or high-interest loans, eating into your future margins

  
  

Before you know it, your projected £150k profit is closer to £120k after extra financing costs and efficiency losses.

Why This Happens

This scenario is common in project-based businesses:

• They focus on profit per project, but ignore the timing of cash

  
  

• They don’t account for WIP exposure, stage payment risks, or retentions

  
  

• They don’t forecast cash flow impact across the full job cycle

  
  

What You Should Do Instead

Here’s what we recommend at Jfa:

• Track cash and profit on every project separately

  
  

• Monitor WIP and retentions monthly to understand actual cash risk

  
  

• Build rolling 3–6 month forecasts to plan staffing, tax, and supplier payments

  
  

• Use monthly health checks to flag early signs of cash stress or margin erosion

  
  

• Always review job profitability vs liquidity impact before committing to new contracts

  
  

What You Can Do Today

Don’t panic just get proactive:

1. Run a weekly cash flow tracker, Track what’s due in and out this week and next. You’ll quickly spot issues before they hit.

   
   

2. Use cloud accounting tools, Xero, QuickBooks, or Sage can help you visualise both cash and profit in real-time.

   
   

3. Start forecasting even in a simple spreadsheet, Look 1–3 months ahead to see if you'll run out of money before invoices are paid.

   
   

4. Don’t assume all sales = spendable money, Only base spending on what’s actually in your bank account or paid upfront.

   
   

5. Schedule regular finance health checks, Just like your physical health, your finances need a monthly check-up to catch issues early.

   
   
   
   

What Jfa Offers

At Jfa, we make this easy and practical:

• Free 1-hour finance health check, We’ll sit down with your books, review your cash flow and profit line by line, and flag risks, leaks, and missed opportunities no obligation, just insight.

  
  

• Monthly management packs that show:

  • Profit and loss

  • Cash in vs cash out

  • Tax due and payment dates

  • Key financial trends you need to act on

    
    

• Ongoing advice in plain English No jargon. Just real support to help you make smart decisions with confidence.

  
  
  
  
  
  

Final Thought: Cash is King But So is Profit

Running a business based on your profit alone is like celebrating the scoreboard when the game isn’t over yet.

Check your profit to know where you’re going. Check your cash to make sure you can get there.

Wrapping up today’s insights, tomorrow we simplify another accounting challenge