Cash flow

Q: What is the difference between cash flow and profit?

Profit is sales minus costs over a period, including invoices not yet paid. Cash flow is the actual money in and out of your bank account. A company can be profitable and still run out of cash if customers pay late — which is why both must be watched.

2 min read

In − OutHow it's measured

30–90 daysTypical payment gap

Definition

Cash flow is the net amount of money moving into and out of a business over a given period. Positive cash flow means more cash is coming in than going out; negative cash flow means the reverse. It measures liquidity — the actual money available to pay bills — rather than profit, which is an accounting figure that can include money you're owed but haven't yet received.

In plain terms

Profit is an opinion; cash is a fact. You can issue £100,000 of invoices in a month and still be unable to pay your VAT bill if none of those invoices have actually been paid. Cash flow tracks the real money, day by day.

It's usually split three ways: operating cash flow (from your core trading), investing cash flow (buying or selling assets), and financing cash flow (loans, repayments, dividends). For most small companies, operating cash flow is the one that keeps you awake at night — the gap between paying suppliers and staff now and getting paid by customers later.

Why it matters to your business

The single most common reason solvent, profitable UK companies fail is a cash-flow squeeze — they run out of money to pay a bill that falls due before their own income arrives. Managing cash flow well means knowing not just whether money is coming, but when.

Tools that smooth the timing matter as much as growing sales: invoicing promptly, chasing arrears, negotiating supplier terms, and using short-term finance to bridge predictable gaps. A flexible credit facility can cover a seasonal dip or a large up-front cost, then be repaid once cash catches up — without selling equity or signing a personal guarantee.

Example

A wholesale business sells £80,000 of goods on 60-day terms in March. Its profit margin is healthy, but the £55,000 it owes suppliers is due in 30 days — a month before any customer pays. On paper it's profitable; in the bank it's heading negative. By forecasting this gap in advance, the directors draw on a working-capital facility to pay suppliers on time, protect their trade relationships and supplier discounts, and clear the facility when the customer invoices settle in May.

Frequently asked questions

What is the difference between cash flow and profit?

Profit is sales minus costs over a period, including invoices not yet paid. Cash flow is the actual money in and out of your bank account. A company can be profitable and still run out of cash if customers pay late — which is why both must be watched.

How do I improve my cash flow?

Invoice promptly and chase late payers, agree longer terms with suppliers, hold less stock, and forecast ahead so gaps don't surprise you. Short-term finance can bridge predictable shortfalls so you keep paying staff and suppliers on time.

What is a cash-flow forecast?

A forward-looking schedule of expected money in and out, usually week by week or month by month. It shows when your balance might dip below zero so you can act early — by chasing payments, delaying spend or arranging finance.