How Profit Differs from Cash Flow (and Why It Matters)

It’s a question business owners ask all the time:
“My Profit & Loss shows a profit — so why doesn’t my bank account?”

It all comes down to one key concept: profit and cash flow aren’t the same thing.

Let’s break it down…

1. Timing Is Everything

Your Profit & Loss (P&L) records income and expenses based on when your accounting system recognizes them — and that depends on whether you use cash or accrual accounting.

• Under cash accounting, income and expenses are recorded only when money actually changes hands. You recognize revenue when you get paid and record expenses when you pay them.

• Under accrual accounting, income and expenses are recorded when they’re earned or incurred, even if cash hasn’t moved yet.

Most established businesses use accrual accounting because it gives a more accurate picture of overall performance — but it also means your P&L can show profit even if the cash hasn’t hit your bank account yet.

For example:

• You might have invoices sent to clients that haven’t been paid yet (income recorded, no cash received).

• Or you’ve recorded bills you haven’t paid yet (expenses recorded, cash still in the bank — for now).

Those timing differences are often the biggest reason your P&L looks strong while your bank account doesn’t.

2. Non-Cash Expenses

Items like depreciation or amortization reduce your profit on paper but don’t actually cost cash. They’re accounting adjustments, not money leaving your account.

3. Loans and Large Purchases

When you make a loan payment, only the interest hits your P&L. The principal portion lowers your cash but not your profit.
The same goes for buying equipment or vehicles — those show up on your balance sheet, not your P&L, but still come out of your bank.

4. Owner Draws or Distributions

When you take money out of your business for personal use, it’s not considered an expense. It won’t show up on your P&L — but your bank balance will definitely feel it.

The Bottom Line

Your Profit & Loss shows profitability, while your bank balance shows liquidity — two related but distinct measures of financial health.

If you’re ever wondering why your profit doesn’t match your cash, that’s a great time to review your cash flow statement with your accountant. Understanding the timing behind your numbers helps you plan smarter, stay ahead of cash crunches, and keep your business financially steady.