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Comparison · Cash Flow

Profit vs Cash Flow: Follow the Dates

Follow a sale from delivery to payment and see why positive operating profit can coexist with a falling cash balance.

By PriceAndProfit Editorial Updated

Profit measures revenue less the costs recognized for a period. Cash flow measures receipts and payments during that period. Under the accrual assumptions used here, delivering a sale, collecting the invoice, buying inventory, and paying the supplier can occur on different dates. A profitable month can therefore consume cash without any arithmetic error.

Follow one month through both views

In a hypothetical month, a business delivers $20,000 of sales. The goods sold cost $8,000, and other operating expenses are $5,000. Its modeled operating profit is $7,000. Assume only $6,000 of the sales are collected this month. The business pays $12,000 for inventory purchases and pays all $5,000 of operating expenses. Its net cash movement is $6,000 − $12,000 − $5,000 = −$11,000.

Operating profit = recognized revenue − cost of goods sold − operating expenses Net cash movement = cash receipts − cash payments
ItemProfit viewCash view
Sales or customer receipts $20,000 $6,000
Goods sold or inventory payments −$8,000 −$12,000
Other operating costs paid −$5,000 −$5,000
Result $7,000 profit −$11,000 movement

The $18,000 difference has two causes: $14,000 of sales remain uncollected, and inventory payments exceed the cost of goods sold by $4,000. Under these simplified assumptions, $7,000 − $14,000 − $4,000 = −$11,000. This bridge explains the difference; it does not change either result.

Carry the balances forward

If opening cash is $15,000, closing cash is $4,000. The business also has $14,000 of new receivables and $4,000 more inventory than it would have had if purchases equaled goods sold. Those assets may support future activity, but neither is cash available today. The next month's forecast should schedule the expected collection and the use or sale of the remaining inventory.

A later $14,000 receipt increases cash and reduces the receivable. It is not a second $14,000 sale. Likewise, selling the additional inventory later creates the appropriate goods-sold cost in that later period; it does not cause a second payment if the supplier was already paid.

Diagnose the difference before changing prices

Build a reconciliation using opening and closing receivables, inventory, and payables, plus any noncash expenses and asset purchases relevant to the business. Keep the example's scope clear: it excludes financing, taxes, owner transactions, and depreciation so the timing effects remain visible.

A positive margin does not establish that payment dates are manageable, and a positive cash month does not establish profitability. Customer advances and overdue vendor bills can temporarily support cash. Review both the operating result and the dated cash schedule before deciding whether the problem is price, cost, collection timing, inventory buildup, or a combination.

Operating profit

  • Measures: Recognized revenue less the costs included in the operating model.
  • Example: $7,000 profit before the excluded items, despite incomplete invoice collection.

Net cash movement

  • Measures: Receipts minus payments on their actual cash dates.
  • Example: An $11,000 decline because customer cash arrives later and inventory purchases exceed goods sold.
Bottom line

Use profit to evaluate the stated operating economics and the cash schedule to test payment timing. Reconcile their difference through the affected balances.

Method references: SEC: Beginners’ Guide to Financial Statements. Accessed October 22, 2026. All dollar figures are hypothetical worked examples.

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