Many business owners look at their profit and loss statement and assume they’re in good shape. But if your bank balance doesn’t reflect that supposed profit, there’s a critical misunderstanding at play. At DWG CPA, we work with countless businesses that appear profitable on paper but are cash-strapped in reality.
This blog explains why cash flow and profit are not the same, how to avoid common pitfalls, and what strategies you can use to monitor both effectively.
Profit is calculated using accrual accounting, meaning it reflects income and expenses when they’re earned or incurred, not when cash changes hands.
Cash flow tracks actual money entering and exiting your bank account. It’s the financial pulse of your business.
While profit shows long-term sustainability, cash flow determines whether you can meet your day-to-day obligations—like payroll, rent, or inventory purchases.
Real-World Insight
A U.S. Bank study found that 82% of small business failures are due to poor cash flow management, not lack of profit. It’s not enough to make a sale—you need to collect the payment.
Unpaid Invoices
You may have booked revenue for a $25,000 project, but if the client hasn’t paid yet, your profit number is misleading. You can’t pay expenses with receivables.
Inventory Overload
Retailers or wholesalers may show a profit due to inventory appreciation or sales booked in advance, but if that inventory hasn’t moved, cash is still tied up.
Accelerated Expenses
Sometimes, you prepay expenses (like insurance or rent) to reduce tax liability. That’s good for your bottom line but drains immediate cash.
In our first 90 days with outsourced bookkeeping clients, these scenarios come up often. We help business owners decode what’s happening behind the scenes.
The cash flow cycle represents the time between when a business spends money (e.g., for materials or marketing) and when it gets paid.
If your cash flow cycle is long—say, 60 to 90 days—you’re constantly operating under pressure. That’s why understanding working capital (current assets minus current liabilities) is key.
Many nonprofit clients also face these challenges. In fact, tracking metrics like cash reserves and burn rate is one of our top recommendations for nonprofit boards.
Cash Flow Forecasting
We provide 30-, 60-, and 90-day projections based on revenue patterns, known expenses, and seasonality. This gives business owners visibility into potential shortfalls or surplus periods.
Tools like Float, QuickBooks Planner, and Fathom help us build intuitive dashboards for decision-making.
Strategic Tax Timing
We guide clients on when to accelerate deductions or defer revenue, based on your business’s cash position. This insight is especially valuable when evaluating your S-Corp vs. C-Corp structure.
Bookkeeping + Advisory
Clean books help you track cash. Advisory services help you make better use of it. If you’re unsure what you need, our blog on bookkeeping vs. accounting can help clarify.
For growing firms, we often support decision-making between hiring an in-house CFO or outsourcing CFO services, both of which impact how you handle both profit strategy and cash planning.
Here’s what we recommend reviewing monthly:
Our clients benefit from visual dashboards and monthly one-on-one walkthroughs to interpret these metrics clearly.
You can’t grow a business on profit alone. Expansion, hiring, marketing campaigns, and capital investment all require real-time liquidity.
Profit tells you your model works. Cash flow ensures you can fund it.
At DWG CPA, we’ve helped countless Houston-based businesses and nonprofits align their cash flow with their growth strategy. Our goal is not just to show you what happened—but to prepare you for what’s next.
If you’re building something important and need a trusted financial partner to grow with you – we’d love to hear from you.
DWG CPA PLLC is a Texas-based accounting firm serving businesses and nonprofits since 2005. We specialize in virtual accounting, tax strategies, and personalized financial guidance across industries like healthcare, construction, real estate, and nonprofits.
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