What’s The Difference Between Cash Flow and Profit?

Understanding the difference between cash flow and profit can help you make better financial decisions and, although both are signs of how healthy your business is, they don’t always tell the same story.

What Is Profit?

Profit is what’s left after you subtract your costs from your income.

In simple terms: Profit = Income – Expenses

There are three main types of profit:

Gross profit: what’s left after you take away the direct costs of producing goods or services (like materials or labour).
Operating profit: the profit after all regular business costs, such as rent, wages, and insurance.
Net profit: the final figure after everything, including tax and interest, has been deducted.

Profit is what appears on your profit and loss statement, and it shows whether your business model works over time.

However, you can be profitable on paper and still run into cash problems. That’s where cash flow comes in.

What Is Cash Flow?

Cash flow is the movement of money in and out of your business.

Positive cash flow means more money is coming in than going out. Negative cash flow means your expenses are higher than your income during a certain period.

Even a profitable business can experience negative cash flow if:

Customers take a long time to pay invoices.
You’ve purchased equipment or stock upfront.
You’re growing quickly and spending before income catches up.

This is why understanding cash flow is essential for keeping your business running day to day.

The Key Difference Between Cash Flow and Profit

The main difference between cash flow and profit is that:

Profit measures your overall financial performance.
Cash flow measures your business’s ability to stay liquid and meet short-term commitments.

Profit is recorded when income is earned and expenses are incurred, even if the money hasn’t yet changed hands, and cash flow tracks when those payments happen.

A Real-Life Example

Imagine you invoice a customer £2,000 for a job. To complete the work, you had to buy materials costing £600. On paper, your profit is £1,400 which looks great on your profit and loss report however, you’ve given the customer 30 days to pay.

So while your accounts show a healthy profit, your cash flow is actually -£600 until the money arrives and you’re temporarily out of pocket, even though the job was profitable.

This is one of the most common issues small businesses face. They’re profitable on paper, but the timing of money coming in and out leaves them short when they need to pay suppliers, wages, or tax.

How Businesses Can Manage This Issue

There are practical ways to reduce cash flow pressure caused by timing:

Take deposits upfront: For example, asking for 25–50% before starting the work helps cover materials and protects your cash position.
Use staged or milestone payments: Instead of invoicing £2,000 at the end of a project, you might invoice £1,000 at the start and £1,000 on completion. This spreads risk and keeps cash moving.
Shorten payment terms where possible: Moving from 30 days to 14 days can make a significant difference, especially for service-based businesses.
Automate reminders and follow-ups: Many businesses suffer cash flow stress simply because invoices sit unpaid and unchased.

Why Both Matter for Your Business

If you only look at profit, you might think your business is performing well, but a cash shortage can stop you paying staff, suppliers, or taxes on time.

If you only look at cash flow, you might miss the bigger picture, like whether your business model is sustainable in the long run.

Keeping an eye on both gives you a full view of your financial health, which is why many businesses use management accounts and cash flow forecasts to monitor both regularly.

At GLX, we help business owners translate their numbers into clear insight. Whether you want to understand how cash moves through your business, or how profitable your operations really are, our team can guide you through it in plain English, and help you make confident, informed decisions about the future.