Why Profit Doesn’t Equal Cash: How One Business Owner Turned Things Around

When Sarah, a freelance marketing consultant, reviewed her year-end financials, things looked great on paper. Her net income showed $80,000 in profit. But when she checked her business bank account, she only had $15,000 in cash.

That's when it hit her—something wasn’t adding up.

Sarah wasn’t spending wildly. She didn’t have a team or a big office lease. So where was the cash?

Here’s what she found—and more importantly, how you can use the same lessons to improve your own cash flow.

1. Sales on Credit

Sarah billed clients on 30 to 60-day terms. The work was done, the invoices were out, and the income showed up on her P&L. But until those invoices got paid, there was no cash coming in.

How this helps you: If you’re waiting to get paid, you’re funding your clients’ businesses. Tighten your payment terms. Offer incentives for early payment or ask for partial deposits upfront. This keeps more cash flowing into your business, more often.

2. Inventory

She had stocked up on branded swag for a big campaign—t-shirts, mugs, notebooks. The costs were already expensed when the items were used in promotions. But the bulk of those items were still sitting in a box in her home office.

How this helps you: Inventory ties up cash until it’s sold. If you’re carrying physical products, keep a close eye on how long they sit unsold. Turnover matters. Fast-moving inventory = faster cash flow. Stale inventory = money sitting on the shelf.

3. Depreciation

That new laptop she bought? It showed up as a capital asset and was depreciated over time. The expense lowered her net income, which helped with taxes. But the cash left her account the day she paid for it.

How this helps you: Depreciation is an accounting tool—it helps lower your tax bill, but it doesn’t reflect real-time cash outlays. Be mindful of big purchases. Even if the cost is spread over time on your books, the money’s gone now. Plan accordingly.

4. Prepaid Expenses

Sarah paid for annual software, insurance, and coworking space all at once to take advantage of discounts. Those payments reduced her income gradually, month by month. But the cash was spent upfront.

How this helps you: Prepaying can be smart if you’re saving money. But too many upfront payments can leave you cash-poor. Know what your prepaid expenses are, and forecast your cash position accordingly. Otherwise, you might find yourself asset-rich but cash-strapped.

5. Loan Payments

Sarah had taken a small business loan to invest in her rebrand. Each month, she made payments that included interest (an expense) and principal (not shown on the income statement). The result? Cash was going out faster than she realized.

How this helps you: Loan payments affect your bank balance even when they don’t show up fully on your P&L. When planning for cash flow, always factor in both principal and interest. Don’t rely on net income alone to determine if you can afford a new loan.

The Turning Point

After reviewing all this with her accountant, Sarah made three changes:

1. She started tracking cash flow. Beyond just a P&L, she began reviewing a cash flow statement each month. This gave her a clear picture of what money was coming in and going out—and when.

2. She changed her billing system. New clients paid 50% upfront. Long-term clients were moved to shorter payment terms. Suddenly, the gap between work done and cash received began to shrink.

3. She created a monthly budget. Rather than spending when she “felt flush,” she used her new visibility into cash flow to make smarter spending decisions. That meant fewer surprises—and more peace of mind.

What You Can Do Next

If this sounds familiar, start by asking:

• Are my profits actually turning into cash?

• Where is my money tied up?

• Am I relying too heavily on my income statement?

Net income matters—but it’s not the full picture. Understanding your cash flow gives you the clarity to run your business with confidence. You’ll know when you can spend, when to hold back, and how to grow without risking your stability.

Want help figuring this out in your business? I help business owners like you get clarity on your numbers, so you can stop guessing and start growing.

Click here to schedule a Right Fit Meeting.