Cash flow vs profit,
with one worked example.
Short answer: Profit is revenue minus expenses on an accrual basis; cash flow is money actually received and paid. They differ because of customer and supplier payment timing, inventory, equipment purchases and loan repayments. In the worked example below, a month with $12,000 of profit ends with cash down $3,000, and every line is a normal business event.
Profit says whether the business earned more than it spent in a period, using accrual accounting. Cash flow says whether money actually came into and left the bank. They differ because of timing and because some items touch only one of them. A business can be profitable and still run out of cash.
A worked example
| Item | Effect on cash | Running total |
|---|---|---|
| Net profit for the month | +$12,000 | $12,000 |
| Depreciation (an expense, but no cash leaves) | +$1,000 | $13,000 |
| Customers owe more than last month (unpaid invoices) | −$9,000 | $4,000 |
| More inventory on the shelves | −$2,000 | $2,000 |
| New espresso machine bought for cash | −$3,500 | −$1,500 |
| Loan principal repaid (not an expense) | −$1,500 | −$3,000 |
| Change in cash | −$3,000 |
Every line is a normal event. Together they turn a good month on the income statement into a tight month in the bank. This is why lenders and CFOs watch a 13-week cash flow forecast alongside the P&L.
What makes them differ
- Timing of customer payments. Revenue is recorded when invoiced; cash arrives when paid.
- Timing of supplier payments. Unpaid bills help cash for now; paying them later reverses it.
- Inventory. Stock bought is cash spent, but it becomes an expense only when sold.
- Capital spending. Equipment is cash out today but reaches profit slowly, through depreciation.
- Loans and owner money. Borrowing, repaying principal and owner draws move cash but are not income or expenses.
Showing both without confusing people
Label every number as cash or profit, and never mix them on one chart. A cash flow dashboard built from bank transactions shows money in, money out and net cash, not profit. Our free template does exactly that, and the step-by-step guide shows how to build it with Claude Code, including the line in the prompt that stops the AI from mixing in accrual logic.
Explaining it to a client
Explain to a small-business owner in five sentences why profit was $12,000 but cash fell by $3,000 this month. Use only these items: depreciation $1,000, receivables up $9,000, inventory up $2,000, equipment bought for $3,500, loan principal repaid $1,500. Keep every number exactly as written.
More prompts like this: Claude prompts for accountants.
Frequently asked questions
What is the difference between cash flow and profit?
Profit is revenue minus expenses for a period under accrual accounting. Cash flow is the actual money received and paid. Timing, inventory, capital spending and loans make them differ.
Can a profitable business run out of cash?
Yes. If customers pay slowly, inventory builds up or cash goes into equipment and loan repayments, cash can fall while profit is positive.
Is depreciation a cash expense?
No. Depreciation reduces profit but no cash leaves the business when it is recorded; the cash left when the asset was bought.
Turn a CSV into a working cash flow dashboard.
A self-paced Claude Code workshop for bookkeepers, accountants and FP&A: six lessons, one project, sample data with expected totals. Taught by CFO Leo Godnik.
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