In plain English
Profit and cash differ because of timing: receivables, inventory, loan payments and owner draws.
A forecast shows shortfalls before they happen.
Why it matters
A business can be profitable and still bounce a payroll if cash arrives later than bills are due. Cash flow tracks the actual timing, which is what pays rent, wages and suppliers. Understanding it helps you decide when to hire, when to buy equipment and whether you need a line of credit before you need it urgently.
Lenders frequently ask how the business generates enough cash to make loan payments, not just whether it shows a profit.
Worked example
Opening cash $18,000, receipts $9,000, payments $11,500 leaves $15,500.
How to handle it
- Reconcile all bank and card accounts so the starting cash figure is reliable.
- Run a statement of cash flows or a simple cash summary for the last few months.
- Build a short forecast in a spreadsheet listing expected receipts and payments week by week.
- Update the forecast with actual results each week and adjust the coming weeks.
- Flag any week where projected cash falls below the minimum you want on hand.
Common mistakes
- Planning from the profit and loss alone, which misses loan principal, inventory buys and owner draws.
- Assuming customers will pay on their terms when they usually pay later, which makes the forecast too optimistic.
- Forgetting large periodic payments such as annual insurance or estimated taxes.
Not the same as: Net income
Net income measures profit earned in a period whether or not cash moved. Cash flow measures the money that actually came in and went out. See Net income.
Go deeper
- How to Build a 13-Week Cash Flow Forecast Step by Step: A step-by-step guide to building a 13-week cash flow forecast for a small business, from opening balance to weekly receipts, payments and a review routine.
- Statement of Cash Flows: A Plain-English Guide: Understand the statement of cash flows: operating, investing and financing sections, why profit and cash differ, and how to use it for decisions.
Try it
Related terms
- Chargeback: A reversal of a card payment forced by the cardholder's bank, usually after a dispute.
- Chart of accounts: The list of accounts a business uses to sort its transactions.
- Cash basis accounting: A method that records income when you receive money and expenses when you pay them.
Common questions
What is cash flow?
The movement of money into and out of a business over a period.
Can you give an example of cash flow?
Opening cash $18,000, receipts $9,000, payments $11,500 leaves $15,500.
Why is my cash flow negative when sales are growing?
Growth often uses cash first. You may be buying more stock and paying more staff while customer payments for those sales have not arrived yet.
What is the difference between operating, investing and financing cash flow?
Operating cash comes from day to day business. Investing covers buying or selling equipment and similar assets. Financing covers loans and money the owners put in or take out.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.