Cash flow vs. net profit

A company can report a healthy profit and still struggle to pay salaries at the end of the month. The reason is timing: profit is recorded when a sale is made, cash arrives when the customer pays.

Where the cash goes

• Customers paying later than agreed, so receivables grow with sales
• Stock bought ahead of demand and sitting in the warehouse
• Capital spending paid in cash while it is expensed over years
• Loan repayments, which reduce cash but never appear as an expense

Reading the two together

Compare operating cash flow with net profit every quarter. When cash consistently trails profit, the business is funding its customers and its stock, and growth will make the gap wider, not smaller.

Practical steps

Agree payment terms before the sale, follow up overdue invoices weekly, and keep a rolling thirteen-week cash forecast that management reviews as seriously as the profit figure.