Cash versus profit

Cash is the money a business has available at a point in time — notes and coins in the till and money in its bank account. Profit is what is left when you subtract total costs from revenue over a period, such as a month or a year. They are not the same thing, and a business has to keep an eye on both.

Profitable but short of cash

A business can make a profit and still run out of cash. Imagine a pottery studio sells £4,000 of mugs in a month but agrees that the shops buying them will pay 60 days later. The studio records those sales as revenue and, if its total costs were £3,000, shows a £1,000 profit. Yet no cash has arrived, so it may struggle to pay the electricity for its kiln or the wages of the people who make the mugs.

Cash also gets tied up in stock — money spent on clay and glaze that has not yet been sold. And large payments, such as a quarterly rent bill, can fall due before customers pay. Timing is what causes the problem, not a lack of profit.

Cash in that is not profit

Not every cash receipt counts as profit. A bank loan, capital the owner puts in, or money from selling an old delivery van all bring cash into the business, but none of them are sales revenue, so none of them count as trading profit. A positive closing balance only shows that cash is available at the end of the period; it does not mean the business has made a profit.