Profitability ≠ Cash Flow | Ep 5

💰 Why Your Profits Aren’t in Your Bank Account (Cash Flow vs. Profit Explained)

📢 Are you making a profit but still struggling with cash flow? Many businesses are profitable on paper but find themselves taking loans to cover payroll and expenses. In this episode, we break down:

✔️ Why profit ≠ cash flow

✔️ Where your money is actually going

✔️ How to fix cash flow gaps and improve financial health

🔔 Subscribe for more financial insights!

⏱️ Chapters

00:00 - Introduction: Profit vs. Cash Flow

00:09 - The Illusion of Profitability

00:26 - Why Businesses Struggle with Cash Flow

01:12 - Where Your Cash is Really Going

01:41 - Accounts Receivable & Late Payments

02:24 - Inventory Management & Cash Tied Up

03:01 - Debt Repayments & Owner Draws

04:00 - How Taxes & Payroll Timing Impact Cash Flow

04:56 - Fixing Cash Flow Gaps

05:52 - Shortening Payment Cycles & Enforcing Collections

06:45 - Inventory Planning & Financial Forecasting

07:26 - Final Thoughts: Creating Sustainable Cash Flow

✅ Key Takeaways:

✔️ Profit on paper doesn’t mean cash in the bank—cash flow management is key!

✔️ Identify where your cash is going: AR, inventory, debt, taxes, payroll.

✔️ Improve payment cycles & collection strategies to free up cash.

✔️ Plan ahead for loan repayments & tax obligations to avoid cash shortages.

✔️ Monitor cash flow separately from profit for better financial decisions.

Thanks for listening! Come Say Hi!

Full Send | Accounting & Data

LinkedIn: Roman Villard, CPA
X: @FullSendCPA
YouTube: Full Send - Accounting & Data
Data Podcast: Data Fuel

Transcript

Have you ever looked at your profit and loss out of QuickBooks and thought, Awesome! We made a profit! Only to check your bank account and wonder where the money actually went? I've worked with so many businesses that were profitable on paper, But where taking out loans to make payroll, to buy inventory, and thus there was an inverse relationship between their profitability and their cash flow due to debt service.

We're going to talk about the CFO mindset around why and how this happens, and then a couple ways that you can think about fixing it. So when we think about profit, that would be the net income line on your P& L. We're looking at your total gross revenue minus your cost of goods sold minus all of your expenses equals your profit.

However, profit also generally includes non cash expenses like depreciation. So just because your profit and loss statement shows a profit doesn't actually mean that money is sitting in your bank account. The real money in the bank, the cash flow, is all about timing.

It's when money actually moves in and out of your bank account. So your cash can be tied up in accounts receivable, in inventory, in debt payments, etc. There's a lot of ways that you can be deploying cash not actually realizing the profit on your P& L. Maybe it's a future profit or maybe it's just simply a timing difference.

Businesses can still be profitable and run out of cash. So where's your cash actually going? Oftentimes, the one of the biggest challenges we see is that in your accounts receivable, you've made a sale, but you haven't been paid yet. So your accounts receivable bounce is sitting there and growing and growing and growing, and you actually don't have a really good collections rhythm.

That's where you've already expended the cash for the service or the product, you know that you've made the sale, but you haven't received any money. That can result. in a tremendous amount of challenges from a timing perspective, if you have aged receivables, same thing with inventory. If you, if you tied up a bunch of cash into your inventory, it's just sitting on your balance sheet until you sell it and it turns into revenue.

So how much inventory are you holding at any given point in time? Because Ultimately, that's just tying up your cash in order to yield a return. One of the things you can look at here is your cash conversion cycle. What is the timing between you outlaying cash to purchase that inventory and then turning that inventory into cash on the back end?

How long does it take you to, move through that cycle. another consideration on where your cash is going is loan payments. So debt repayments, credit card repayments don't show up on the P&L, but it does affect your cash flow. You need to really granularly look at the debt that's on your balance sheet and understand the relationship of your current cash on hand with Relative to your current liabilities, that would be your current ratio.

Something to really take a look at. And generally I would like to see a two to one ratio of cash and accounts receivable or current assets on hand relative to your current liabilities. You can also sink a business via owner draws and distributions. We've seen several instances of. Owners of their businesses kind of sinking their ability to grow because they are over distributing the cash to themselves.

When you're pulling out too much cash without realizing the downstream impact of being able to serve customers really well, or purchase inventory, you may have to actually pull out a loan. And then because your cost of living has increased due to these increased distributions, it's going to be really difficult to balance that out for the business.

Another thing to be thinking about is that. Taxes and payroll timing can have a big impact on cash. hopefully if you're an LLC environment, you are paying quarterly tax payments. however, you can put the business into a pickle. If you're an LLC and making tax distributions, but are not withholding that cash to the side to make that distribution, to cover your taxes.

So how do we fix cashflow gaps in the business? We should be tracking cashflow separately from your profit. Those are two different numbers. So you should be looking at your cash on hand. Maybe it's burn. How much cash are you deploying every single month relative to what's coming in from revenue, and then look at your profits separately.

We want to shorten our payment cycles. So we want to invoice faster. We want to require deposits on services. We want to. Enforce collections. Ensure that our accounts receivable aging does not get out of hand. We want to watch inventory levels. Let's set a benchmark for what's a really healthy inventory balance to be at.

And maybe it's inventory levels on a SKU by SKU basis based on the velocity of SKUs that you're selling. So we don't want to overbuy inventory that's sitting on the shelf for months and months and months, because effectively you're just tying up your cash. We want to plan for loan and tax payments. You should never be taking out debt without a plan in place to repay that debt.

And so if you have a plan in place for that, that's great. We need to monitor and stick to a plan in order to ensure that the cash balance in your business doesn't get overweighted one way or another. We also want to build a cash buffer. We want to. Ensure that we've got enough capital in the business to continue taking the strides forward to the goals that we have.

So we are not relying on credit to survive and to get through the inevitable seasonalities of business. What we see so often is that business owners are relying too much on their profit and loss on their net income.

As success and as cash in the bank, those are two very different things. We see a lot of businesses actually growing too fast. It's, it's kind of a misnomer that growth equals less cash, but you have to invest to grow. And when you're growing really quickly, you may not have enough working capital or cash on hand to be able to continue making the investments required to keep up with that growth.

Oftentimes we do see business owners. Paying off debt too aggressively. And that's just a function of not having a plan in place to ensure that your cash balances are actually rising while simultaneously paying off debt. You can get too aggressive with that and actually handcuff yourself on the operational side of the business.

Now, when you're not reviewing your cash flow statements, and you're only looking at the PNL, you don't really good sense as to where the cash is going. so by nature of looking at both the profit and loss statement and your statement of cash flows, you can start to see how movements of your cash are happening within the business.

So if you're not tracking cash on hand, start tracking that. And it could be as simple as just looking at your cash balance on a month to month basis to see what those movements Look like to you. And if there are any trends in that, take a look at your AR and your invoicing terms, make sure that the collectability of the invoices you've sent out is really high.

take a look at your last three, six months of cash inflows versus cash outflows. Are you running at a cash deficit? Again, that is not going to be a view from the PNL. So take a look at your cash movements on a monthly basis.

If you can get a good handle on your cash on a month to month basis and create a good rhythm of reviewing your cash and understanding where it's going without simply looking at your bank balance or simply looking at your net income to determine the health of the business. You will start to create a better rhythm of understanding how the investments you're making are undervalued.

Actually growing your business and creating more profitability and creating a better ROI on the investments you're making with your cash. So I hope that's a helpful overview on how to think about cash, how to think about creating better rhythms for your business in order to help you become a more profitable, sustainable and growing business in 2025.