A business can report a profitable period while facing a cash shortage. The explanation often begins with timing: when revenue and expenses are recognized can differ from when money enters or leaves the bank.
This distinction matters when deciding whether the business can meet its commitments. The illustration below uses simplified accrual accounting and is not a tax calculation.
Follow one transaction
Suppose a service company completes and invoices $10,000 of work this month. Assume $6,000 of related expenses are recognized and paid this month, the customer pays next month, and there are no other transactions.
Under those assumptions, the simplified profit is $4,000, but the current-month cash movement is negative $6,000. When the customer later pays, the cash arrives without creating the same revenue a second time.
Real accounts may involve taxes, deposits, financing, depreciation and other items. Keep those details in the accounting records rather than forcing them into this simplified example.
Ask three separate questions
Revenue asks what sales belong to the reporting period under the applicable accounting method. Profit asks what remains after the relevant expenses. Cash asks what money is available and when receipts and payments occur.
A loan can increase cash without becoming sales revenue. Buying equipment can reduce cash without the entire purchase necessarily becoming an expense in the same period.
Review timing alongside performance
Maintain a dated view of expected receipts and payments and distinguish confirmed amounts from estimates. Reconcile actual cash activity with the records instead of relying only on the sales dashboard.
Reference: SBA — Manage your finances. Consult your accountant about the method and reporting rules applicable to your company.