Profit isn’t cash. They’re calculated differently, they measure different things, and they almost never match. A business can be profitable and broke at the same time. Understanding why is one of the most important financial concepts for a business owner.

Your Profit & Loss statement shows revenue you’ve earned minus expenses you’ve incurred during a period. If you completed a $10,000 job in March, that revenue hits your P&L in March. But if the customer doesn’t pay until May, the cash doesn’t arrive for two months. Your P&L says you made money. Your bank account says otherwise.

Accounts receivable is the most common culprit. You’ve done the work, booked the revenue, but the cash is sitting in someone else’s account until they pay you. Check your balance sheet. If receivables are high relative to your revenue, that’s where your profit went. It’s not gone, just not collected yet.

Inventory eats cash too. You bought $30,000 in materials that are sitting on shelves or in a warehouse. That purchase doesn’t show as an expense on your P&L until you sell the product. But the cash left your account the day you paid for it. Profitable on paper, cash-poor in reality.

Loan principal payments don’t appear on your P&L. Only the interest portion counts as an expense. If you’re paying $2,000 a month on an equipment loan and $1,700 of that is principal, your P&L only shows $300 in expense. The other $1,700 still leaves your bank account every month, it just reduces a liability on your balance sheet instead of hitting your P&L.

Equipment purchases work the same way. Buy a $40,000 truck and your cash drops by $40,000 immediately (or you take on $40,000 in debt). But the P&L only shows depreciation expense spread over several years. You might expense $8,000 this year while the full $40,000 already left your account.

Owner draws reduce cash but aren’t expenses. When you take money out of the business for personal use, it’s a reduction in equity, not an operating expense. Your P&L doesn’t change. Your bank balance does.

Prepaid expenses hit cash before they hit the P&L. Pay your annual insurance premium in January and $12,000 leaves your account immediately. But the expense recognition spreads across twelve months. January’s P&L shows $1,000 in insurance expense while your cash dropped by $12,000.

The fix isn’t choosing between profit and cash. You need both views. The P&L tells you whether your business model works. Are you charging enough and controlling costs? The cash flow statement or a simple cash forecast tells you whether you can make payroll next Friday.

Monthly bookkeeping gives you both reports consistently. If you’re only looking at the P&L or only checking your bank balance, you’re flying with one eye closed. Profitable businesses run out of cash all the time. Usually because the owner didn’t see it coming.