Why Is Profit High, But Cash Low? Understanding the CFO Mindset

Have you ever looked at your profit and loss statement and thought, Great! We made a profit!—only to check your bank account and wonder where the money actually went? If so, you're not alone. Many businesses find themselves profitable on paper but struggling with cash flow due to debt service, accounts receivable, or inventory management.

This article explores why this happens and how you can fix it by adopting a CFO mindset.

The Difference Between Net Incomeand Cash Flow

"When we think about profit, that would be the net income line on your P&L. However, profit includes non-cash expenses like depreciation. Just because your P&L shows a profit doesn’t mean that money is actually in your bank account."

Net Profit (Net Income)

Net Profit is calculated as: Total Revenue - Cost of Goods Sold - Expenses = Profit

But here’s the catch—profit includes non-cash items like depreciation and amortization, meaning that even if you show a profit, the cash may not be in your bank account.

Cash Flow

Cash flow, on the other hand, is all about timing. It represents the actual money moving in and out of your business. Cash can be tied up in:

• Accounts receivable (sales made but not yet paid for)
• Inventory (cash spent on stock that hasn't yet turned into revenue)
• Debt repayments (which don’t appear on your P&L but impact cash flow)

"Businesses can still be profitable and run out of cash."

Where Does Your Cash Actually Go?

1. Accounts Receivable (AR) Issues

"You've made a sale, but you haven’t been paid yet. If your AR balance keeps growing, you may be struggling with collections."

• Solution: Shorten payment cycles by invoicing faster, requiring deposits, and enforcing collections.

2. Inventory Management

"If you’ve tied up a bunch of cash in inventory, it's just sitting on your balance sheet until you sell it."

• Solution: Track inventory turnover and optimize stock levels to free up cash.

3. Loan Payments and Debt Service

"Debt repayments don’t show up on the P&L, but they affect cash flow. You must carefully manage the balance between cash on hand and liabilities."

• Solution: Maintain a 2:1 ratio of current assets (cash + AR) to current liabilities to ensure liquidity.

4. Owner Draws and Distributions

"Business owners sometimes sink their company by withdrawing too much cash for personal use."

• Solution: Balance distributions with the cash needs of the business to avoid relying on loans.

5. Tax and Payroll Timing

"If you don’t set aside cash for quarterly tax payments, you could end up in a financial crunch."

• Solution: Plan for tax and payroll expenses in advance.

How to Fix Cash Flow Gaps

1. Track Cash Flow Separately from Net Income

"You should track cash flow separately from profit because they are two different numbers."

• Monitor cash on hand and monthly burn rate.
• Compare cash inflows vs. outflows.

2. Shorten Payment Cycles

"We want to invoice faster, require deposits, and enforce collections."

• Set clear payment terms.
• Follow up on outstanding invoices.
• Offer early payment discounts.

3. Optimize Inventory Levels

"Don’t overbuy inventory that sits for months—this just ties up your cash."

• Analyze SKU velocity to stock efficiently.
• Avoid excess inventory that doesn’t sell quickly.

4. Plan for Debt and Tax Payments

"Never take on debt without a repayment plan. Stick to a structured plan to avoid cash shortages."

• Schedule repayments strategically.
• Set aside cash reserves for taxes.

5. Build a Cash Buffer

"We want to ensure that we have enough capital to survive seasonal fluctuations without relying on credit."

• Maintain an emergency fund.
• Avoid overextending finances.

Why Growing Too Fast Can Hurt Cash Flow

"It's a misnomer that growth equals more cash. Growth requires investment, and if you expand too fast without enough working capital, you may run out of cash."

• Monitor working capital needs.
• Ensure financing is in place before scaling up.

The Importance of Reviewing Cash Flow Statements

"If you're only looking at the P&L and ignoring cash flow, you don’t truly understand your business’s financial health."

• Track cash on hand monthly.
• Review AR aging to ensure invoices are being collected.
• Compare cash inflows vs. outflows over 3-6 months.

Final Thoughts

If you only rely on net income as a measure of success, you risk financial trouble. Net Income is important, but cash is king.

By tracking cash flow separately, optimizing accounts receivable and inventory, and planning for debt and tax obligations, you can ensure a profitable and financially sustainable business.

"If you can get into the habit of reviewing your cash flow alongside your P&L, you’ll build a business that thrives—not just survives."