Explained
A profitable business can still fail if its profit is locked up in customers who have not paid and stock that has not sold. Profit is an accounting number that measures performance; cash is a bank number that pays wages. That is why an income statement and a cash position are read together, never one alone.
Example
A month shows 40,000 profit, but 55,000 of it sits in uncollected invoices: cash fell even though the books show a profit.
Related terms
- Income statementAn income statement shows a business’s revenue and expenses over a period; the difference is the net profit or loss.
- Accounts receivableAccounts receivable are the amounts customers owe a business for invoices issued but not yet collected.
- Accounts payableAccounts payable is what a business owes its suppliers for goods or services it has received and not yet paid for.