The Difference Between Cash and Profit
Robin Helweg-Larsen
Published Date
Cash is like air; profit is like food. You need cash all the time, but you can survive, for a while, without profit. All employees must understand the difference between cash and profit to make the best decisions for your company.
Cash vs. Profit
Cash is the money that flows in and out of a business during a specific period.
Profit is revenue minus expenses during a specific period.
Why Profit Matters
Profit is essential for a business to grow. If no profit is generated over the long term, the business will see its original investment dwindle, and new investors will stay far away. If the business is lucky, a buyout will occur, and the company will likely disappear.
Why Cash Matters
Overlooking cash flow is just as dangerous. Cash is necessary for short-term survival. Without enough cash to cover daily expenses, even a profitable business can fail.
The Danger of Confusing Cash and Profit
When you're profitable, you tend to think in overly simplistic terms: "If I do twice as much of what I'm doing, I'll make twice as much profit."
But here’s the problem: Expansion requires significant upfront cash. Expenses like equipment, hiring, leases, and product development happen months before sales generate revenue. Even after sales happen, customers might take months to pay.
During this period, companies must carry these costs or watch profit margins shrink as they scramble for cash.
Growth is one of the riskiest phases for a business. Companies that underestimate cash flow needs may:
High-Growth Startups: A Case Study in Cash vs. Profit
Entrepreneurs, especially high-tech startups, face this challenge constantly. They spend years investing in R&D and infrastructure before seeing returns. If they fail to plan for extended cash burn, their business will collapse before it ever reaches profitability.
How Income|Outcome Manages Cash vs. Profit
At Income|Outcome, we see this firsthand. When we bring on a new client, we pay significant costs upfront—consultants, printing, travel expenses—long before we receive payment.
When clients delay payments for six months, the sale is profitable, but we don’t see the cash for a long time. Meanwhile, we must cover expenses now.
That’s why we focus on strong cash flow management—ensuring we can operate through the waiting period before profits materialize.
How to Balance Cash and Profit
Avoiding cash flow crises while maintaining profitability requires three key steps:
1. You Need a Strategic Plan
Where do you want to go? What’s the long-term vision? Your strategy should guide financial decisions, not the other way around.
2. You Need a Budget
A budget, based on past profit and loss (P&L) statements, helps you project whether your business can be profitable.
- Use your past six-month P&L to estimate future profitability.
- Ensure profitability first before worrying about cash flow.
- A business without profit cannot survive long-term.
3. You Need a Cash Flow Forecast
A budget shows projected profitability, but it doesn’t tell you when cash will arrive. That’s where a cash flow forecast is critical.
- Plan at least a year ahead to track when and where cash flows in and out.
- Identify gaps where expenses exceed incoming cash and plan accordingly.
- Investors and banks prefer businesses that demonstrate financial foresight.
If your plan doesn’t work on paper, it won’t work in reality. Keep refining until cash and profit align.
Cash and Profit Are Not the Same
The bottom line: Cash is not profit, and profit is not cash.
Vision starts a business. Profit fuels growth. Cash flow keeps it alive.
A business with strong cash flow can comfortably expand without panicking when growth takes longer than expected. The key is balancing both cash and profit to sustain long-term success.
Building Financial Acumen for Better Decisions
While these tips provide a starting point, financial acumen is essential at all levels to manage cash and profit effectively.
At Income|Outcome, our Business Decisions & Results and Finance & Decision-Making simulations teach employees how to:
✅ Use financial statements effectively
✅ Forecast cash flow and profits
✅ Make better financial decisions
Our simulations are fun, engaging, and create lasting behavioral change. When employees understand cash vs. profit, they can think like business owners and act in your company’s best interest.
Ready to Build Financial Acumen in Your Team?
Let’s talk about how Income|Outcome’s business simulations can help your employees make better financial decisions.
