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My Business Has Cash, Why Aren’t We Profitable?

August 7, 2012 by Ed Becker

Many small business owners do not understand the key difference between cash and profitability. How are these two critical financial barometers different?

Cash Flow

Cash flow is the money that flows in and out of the company.  It is the money used in normal operations (day to day functions), financing activities (purchase of new machinery), and investment activities (investments and shareholder loans).

Cash flow is essential for a small business in order to keep its doors open, pay vendors and most importantly, meet payroll.  Various things must be done right for inflows to exceed outflows and keep your cash positive (i.e. pricing of products, inventory levels, collections of Accounts Receivable, etc.).


Profit, also referred to as Net Income, is the difference between revenue and expenses.  Net losses can sometimes be absorbed by small businesses, but if year-over-year these continue, the business is most likely not going to survive.

Profit can be negative even when a business has plenty of cash in the bank. How can this be? We have been asked by many of our clients to explain this and the majority of owners do understand once they are shown the reasons.

Cash can be positive for several reasons (a few examples are listed):

  1. The owner has put in personal funds which are not displayed on the profit and loss statement
  2. The business has obtained external financing (loans, lines of credit) both of which can increase your cash position
  3. Borrowing from friends and family

So the business is losing money (not profitable), but with additional borrowing and inflows of cash, your bank balance can look adequate.  This trend of increasing cash and never correcting the profitability will drive a business into a very short existence.

You should speak to your outsourced accounting service provider or your CPA, but don’t let the underlying losses continue.

At OSYB we spend time with our clients explaining the difference between cash and profitability, and making sure that our clients understand what needs to be done in both the short and long term to ensure their success.  Want to learn about working with us?  Find out how outsourced bookkeeping with OSYB works.

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