One of the most common misunderstandings among entrepreneurs is the belief that profit equals cash in the bank.
In reality, many profitable businesses fail — simply because they run out of cash.
What is profit?
Profit is what remains after expenses are deducted from revenue on paper. It is calculated in financial statements and is essential for measuring performance.
However, profit does not tell you:
- When money is actually received
- When payments are due
- Whether the business can meet short-term obligations
What is cash flow?
Cash flow reflects the movement of money in and out of your business.
It answers practical questions such as:
- Can I pay suppliers this month?
- Can I cover salaries?
- Can I handle unexpected expenses?
A business can be profitable and still face serious cash flow problems if income is delayed or expenses are poorly timed.
Why entrepreneurs confuse the two
Cash flow and profit are often discussed together, but they serve different purposes. Without proper financial education, it’s easy to focus only on profit while ignoring cash movement.
This is especially common in SMEs where:
- Invoices are paid late
- Expenses are paid immediately
- Planning is informal
Why understanding both matters
When entrepreneurs clearly understand the difference between cash flow and profit:
- Short-term risks are reduced
- Financial stress decreases
- Planning becomes proactive
- Growth decisions improve
At Newera Consultants, we focus on helping business owners understand both concepts clearly — so they can manage their businesses with confidence and stability.