Cash flow vs profit: differences and finance options

Profit is your total revenue number minus any costs. Profitability is an accounting measure of whether your business works – in other words, are you generating a profit. Cash flow is the actual money moving in and out of your company’s bank account. 

Your business can be profitable and still run out of cash, or cash-healthy without being profitable. Understanding both these accounting metrics is vital to understanding your company’s overall financial health and putting you in control of your financial management. 

*Note, this guide is for informational purposes only and should not be treated as financial advice. 

What is profit?

Let’s kick off by explaining exactly what your accountant means when they talk about profit.

Profit is your company’s revenue minus expenses, over a given period – usually monthly, quarterly or annually. 

The formula for calculating profit is:

Gross Profit = Total Revenue - Cost of Goods Sold (COGS)

Profit is recorded when you make a sale. For each sale you make, revenue (income) is generated and a direct cost (part of your overall Cost of Goods Sold) is incurred. It’s recorded in your accounts when the sale is made, not when the money actually changes hands. The profit will then appear in your profit and loss (P&L) report.

It’s worth knowing that there are two main types of profit: 

1. Gross profit = your revenue minus any direct costs

2. Net profit = your revenue minus all expenses, including tax, etc. 

What is cash flow?

Cash flow measures the movement of money in and out of your business bank account. When you spend money, that’s a cash outflow; when you get paid money, that’s a cash inflow.

Cash transactions are recorded in your accounts when the money actually moves in or out, not when a customer is invoiced or a bill is raised. 

In an ideal world, your aim is to achieve what’s known as a ‘positive cash flow position’. This means having more cash inflows than cash outflows – in other words, you’re earning more cash than you’re spending, leaving you with surplus cash.

If your expenditure exceeds your revenues, the business will end up in a negative cash-flow position. If left unchecked, this can lead to long-term cash issues.

How do profit and cash flow compare?

Here’s a table to explain the key differences between profit and cash flow:

How a profitable business can run out of cash

It may sound counter-intuitive, but your business can appear profitable in your accounting software but cash-poor when you look at your bank balance and cash-flow position.

To understand this, it’s important to remember that profits are recorded in your accounts as soon as you raise an invoice. But cash flow only changes once money is received.

For example, you could raise an invoice of £2,000 for work that’s been delivered to a customer, with 60-day payment terms on the invoice. The profit associated with this invoice now exists in your profit and loss account. But the costs of wages, rent and raw materials to deliver the work total £1,250. And these expenses have already been debited from your bank account.

At this point, it looks like you’ve made a gross profit of £750:

Revenue (£2,000) - Cost of Goods Sold (£1,250) = gross profit of £750

If you’re using 60-day payment terms on your invoices, you won’t get paid the £2,000 for two months. However, you’re already £1,250 out of pocket, due to the costs of the work. 

It’s easy to see how longer terms and slow payment can negatively impact the company’s cash-flow position.

Common causes of poor cash flow

To stay in a positive cash-flow position, you need the customer to pay as quickly as possible. This means reducing the gap between the profit being recorded, and the cash from the customer’s payment hitting your account.

Typical reasons for poor cash flow can include:

• Slow-paying customers who fail to pay by the invoice deadline.

• Long payment terms of 60 to 90 days. Aim for 14-30 day terms, if possible. 

• High upfront costs, like stock or raw materials, causing high cash outflows.

• Rapid growth in the business consuming cash before profit catches up, 

• Seasonal timing mismatches, where you experience high levels of sales (and the associated COGS), but seasonal revenue doesn’t land in the bank on time.

How a business can look cash-healthy without being profitable

It’s also possible to have a healthy cash-flow position without the business being profitable.

Because your accounting software records transactions differently than your bank statement, your business can show a loss on paper while having cash in the bank. This is a key financial red flag – a business that doesn’t deliver profit, in the long-term, is no longer viable.

Here’s an example of this unprofitability in practice:

• You sell your goods to a customer for £10,000. But those goods cost £12,000 to manufacture, resulting in you making a £2,000 loss. 

• Despite this loss, you can still appear cash-healthy by collecting the £10,000 cash immediately from the customer, while also delaying payment to your suppliers. This temporarily boosts your bank balance, despite the transaction being unprofitable. 

• Cash is coming in, and costs are being delayed, so your cash position seems good. But if you habitually make unprofitable sales, this will impact your bottom line (net profit) and the business will become unprofitable.

Common cause of poor profitability

Typical reasons for appearing cash healthy, while failing to turn a profit, include: 

1. Inaccurate job costing: If you miscalculate your direct costs, this leads to underpricing products below their Cost of Goods Sold. Revenue flows in immediately, masking these losses and disguising the unprofitable nature of your operations

2. Financing and equity injections: Borrowing funds or raising equity capital instantly injects cash into your bank account. This external capital artificially inflates your cash balances while masking any ongoing operational losses.

3. Extended credit from your suppliers: Delaying payments to your suppliers creates a short-term accumulation of cash. If you collect your customer payments faster than you pay supplier bills, this temporarily masks an unsustainable, loss-making cost structure.

4. Sales of non-operational assets: Selling equipment, vehicles or property generates sudden cash inflows. These one-off capital injections boost your cash position while core operations continue to lose money.

Why the difference between cash flow and profit matters

Knowing the different ways profit and cash are recorded and accounted for is a critical step for any financially conscious business owner. 

In an ideal world, you want your business to be both profitable and cash-healthy. So, knowing the difference between your cash position and bottom line can be vital.

And it’s not just a case of that profit number being a point-scoring exercise or a way to track performance. Cash flow and profit are important metrics for many reasons:

• Lenders and investors often look at cash flow specifically, not just the profit figure, when assessing the health of your business. 

• When you track both cash flow and profit, you keep yourself 100% in control of your financial health and your ability to both a) turn a profit and b) access liquid cash.

• Managing both metrics, not just one, is what keeps your business trading. As we’ve seen, a business can be profitable in your accounts, but cash poor in reality.

How Funding Circle can help you stay cash-healthy

To trade successfully, you need liquid cash to cover your operations, growth and development, plus a financial strategy that delivers clear, measurable profits at the end of a period. 

Having access to credit increases your financial flexibility and makes it easier to stay cash-healthy, while using your additional working capital to drive and grow the business.

Funding Circle’s Flexipay is your cash-flow companion, giving you a flexible credit line and card to cover operational costs, ad-hoc expenses and regular overheads and expenditure.

Spread the cost of buying stock, VAT bills and supplier invoices, or cover an unexpected cash gap when late payments from your customers start to impact your cash flow.

Flexipay gives you:

• A credit limit up to £250,000

• One flat fee from 1.99% per use, rather than interest

• The ability to repay over 1 to 12 months on facilities taken out post July 2024.

Instead of negotiating an overdraft with your business bank, apply online for Flexipay and get a decision in four minutes. No hanging around, with instant access to the cash you need.

Who’s eligible for Flexipay?

To apply for Flexipay, you need to:

• Be a UK limited company

• Have at least one year’s trading history

Applying for our flexible credit line doesn’t affect your credit score. But we will need a personal guarantee from you when signing up for Flexipay. Hard search is only conducted once you accept an offer. 

As with all finance decisions, it’s good practice to get independent financial and legal advice before applying for any line of credit.

Find out more about the benefits of Flexipay and how to apply.

Ready to get in control of your cash flow with truly flexible credit?

Apply today for Flexipay

Cash flow vs profit FAQs

Can a business be profitable but still run out of cash?

Yes, profits are accounted for immediately in your profit and loss account. But cash flow is only recorded once the cash is received in your bank account. Potentially, this can lead to a healthy profit in your accounts but a negative cash-flow position.

Can a business have good cash flow but not be profitable?

Yes, your business can show a loss on paper while still having cash in the bank. If there are injections of non-operational cash into the business, or you inaccurately cost a job, you can end up cash-healthy in the moment, but making a loss (being unprofitable) in the longer term.

What’s the difference between gross profit and net profit?

Gross profit is your revenue minus the direct costs of delivering the goods or services. Net profit is revenue minus all deductions, including things like tax and loan repayments etc. 

How can I improve my business’s cash flow?

The key way to improve your cash position is to boost your cash inflows (revenue, investment or capital injections, etc.) and to reduce your cash outflows (operating expenses, debt repayments or tax bills, etc.). If cash inflows outweigh your outflows, you’re in a positive cash-flow position.

Which matters more, cash flow or profit?

Both cash flow and profit are important to the financial health of your business. Positive cash flow provides the liquid cash and working capital needed for you to cover your operational expenses. Profit provides the long-term funding to run, manage and grow the business over time, while also allowing dividend payments to be paid to the company shareholders.

What is a cash flow forecast?

A cash-flow forecast is a projection of your future cash inflows and outflows, used to predict whether you will be in a positive or negative cash-flow position. The forecast is worked out by projecting forward the historic cash data in your accounts. 

Disclaimer

03/10/26 –  While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.