Profit is not cash: a clear guide for owners

Where cash can go while profit remains

• Under accrual accounting, customers have been invoiced but have not paid yet, because revenue is recorded at the sale rather than at collection.
• How wide the gap runs depends partly on the accounting method. Accrual accounting records revenue when it is earned and expenses when they are incurred, so profit can move well ahead of cash. Cash basis records both when money actually moves, which narrows the gap on receivables but not on inventory, equipment, loan principal, or owner draws.
• The business purchased inventory, equipment, or other assets.
• Debt principal was repaid even though only interest is an expense.
• Owners took draws or distributions.
• Cash is on hand but already committed to payroll, sales tax, income tax, or another upcoming obligation, so it is not available to spend.

Use three statements together

The income statement describes performance over a period. The balance sheet shows what the business owns, owes, and has accumulated at a point in time. The statement of cash flows explains how operating, investing, and financing activity changed cash.

Make the question specific to the decision

Instead of asking only whether cash is low, ask what the business is preparing to do: hire, buy equipment, take an owner distribution, pay a tax obligation, or withstand a slow collection cycle. The decision determines which forecast and time horizon are useful.