Most owners learn this the hard way: the profit and loss statement says the month was good, and the bank balance says otherwise. Both are right. They are measuring different things.
Why profit and cash drift apart
Profit is an accounting result. A sale is recorded when it is made, not when the money arrives. A purchase of stock is not an expense until the stock is sold. So a growing business can show rising profit while the cash that funds that growth is sitting in unpaid invoices and unsold inventory.
Three places to look first
- Receivables. Money customers owe you. If the average customer takes longer to pay than before, profit is being converted to cash more slowly.
- Inventory. Stock bought but not sold. Slow-moving items are cash that has been turned into shelf space.
- Payables. What you owe suppliers. Paying earlier than needed moves cash out sooner than the business requires.
Together these three make up working capital. When working capital grows faster than profit, cash tightens, even in a good year.
Profit tells you whether the business model works. Cash tells you whether the business survives the month.
A simple monthly habit
Put three numbers beside your profit every month: receivables outstanding, inventory held and payables due. Look at how each moved since last month. A profit that rose while receivables and inventory rose faster is a warning, not a celebration.
This is also why a cash view belongs in the monthly MIS, next to the profit view, and not in a separate report that nobody opens.