A business can report a profit and still struggle to meet its financial commitments.
This often surprises business owners, but profit and cash flow measure different things.
Profit is calculated by matching income with the expenses incurred in earning that income. Cash flow shows the actual movement of money into and out of the business.
A profitable SME may therefore experience cash-flow pressure when:
- Customers take too long to pay
- Money is tied up in slow-moving inventory
- Suppliers are paid before customer collections are received
- The business purchases equipment or repays financing
- Sales grow faster than the working capital available
- Owner withdrawals are not aligned with cash availability
For effective decision-making, management should review profitability, financial position, working capital and cash flow together—not as separate matters.