Financial statements
How a profitable company can still be short of cash
Profit and cash flow: the definition
Profit reflects income and expenses recognised for a period. Cash flow records cash moving into and out of the business. They measure different things.
What it means
Revenue can be recognised before a customer pays. Buying stock can use cash before the stock is sold. Non-cash charges can also affect profit. The cash flow statement helps explain the difference through operating, investing and financing activities.
ILLUSTRATIVE EXAMPLE
A business records a £10,000 credit sale when the accounting requirements are met, but the customer pays next month. The sale can affect this month's profit without bringing in cash this month.
What to check
- Are customers taking longer to pay?
- Is more cash tied up in stock?
- Is cash coming from operations, new borrowing or new shares?
Read the cash flow statement alongside the profit figure.
Sources and review date
Reviewed by Edravo on 6 September 2026.
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