What profit and cash flow measure
Profit reflects the difference between income and expenses for a period, according to the relevant reporting basis and rules. Cash flow describes actual receipts and payments. In accrual accounts, income may be recorded before a customer pays, and an expense may relate to a period different from its payment date.
Money entering the account is not necessarily sales income either. For example, receiving a loan increases available money without creating sales profit. Understand what is behind account movements before using them to assess business results.
A small example of a large gap
In this illustrative example only, a business recorded monthly income of ILS 30,000 and expenses of ILS 22,000 on an accrual basis. Its profit was ILS 8,000. However, only ILS 14,000 was received from customers that month, while all ILS 22,000 was paid.
The result: cash outflows exceeded inflows by ILS 8,000. The opening balance must fund the gap until collection. This simplified example excludes VAT, taxes, financing and other movements; it illustrates why profit does not guarantee available funds in the same month.
Where to look for the gap
Start with unpaid customer balances: agreed payment dates, overdue amounts and items awaiting approval or a document. Then check for inventory not yet sold or equipment paid for now. These are situations where money goes out before activity generates its return.
Separately review loan repayments, periodic payments and transfers to owners, according to the way the business operates and its structure. Growth can increase operating funding needs before payments for new sales arrive.
Build a forecast around cash dates
Start with the known balance and list expected receipts and planned payments for each week. Separate confirmed payments from possible sales. Include nonmonthly payments and ask your accountant for an appropriate estimate of business tax payments.
Beside an uncertain amount, record its underlying assumption. Also test a scenario where a major customer pays later. The aim is to identify when a gap may arise and what needs clarification before committing to new expenses.
Turn the review into a practical conversation
Identify the main cause of the gap: collections, payment terms, inventory, a one-off expense or low profitability. Each requires a different review. Changing transaction terms requires agreement with the other party, and reducing an expense must take its operational effects into account.
Update the forecast against actual results. If the same gap recurs, review the assumptions and business structure more deeply. The picture becomes useful when it leads to a specific question that can be investigated.
Five initial checks
- What is today's known cash balance?
- Which receipts are based on commitments and which on estimates?
- What is already due but remains uncollected?
- Which large payments are approaching?
- What happens if the main receipt is delayed?
Questions and answers
Do more sales always improve cash flow?
Not necessarily. If inventory or labor must be paid for before collection, increased sales can initially widen the funding gap.
Does a high bank balance indicate profit?
Not necessarily. Check the source of the money and payments still to be made. The balance may include, for example, loan proceeds or receipts intended to fund future work.
This article is general information, not advice tailored to your business and records.
