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Rung 1 of 5 · Cash vs. profit

Why a profitable company runs out of cash

A lemonade stand you can run yourself shows how a company misses payroll while it is still profitable.

For educational purposes only. This material is general education about managing cash flow. It isn't legal, tax, accounting, lending, or investment advice, and reading it doesn't make you our client. Every business is different. Before you act on anything here, confirm it with your attorney, your CPA or tax advisor, your lender, and any other professional who advises your company. See the terms of use.

Cash flow is money actually moving in and out of your pocket. Profit is an accounting idea: what you earned, whether or not you've collected it.

Picture a lemonade stand. You spend $20 on lemons and cups. You sell $50 of lemonade, but some neighbors say they'll pay you next week. On paper you made $30. In your pocket, you have far less. If the table rent is due Friday, you miss it while being "profitable."

Businesses fail when they run out of cash, not when they run out of profit.

Lemonade standDrag the sliders
Profit
Cash in pocket
Owed to you
Where the numbers come from

    Try it: push "pay you later" to 0% and the rent problem disappears, with the exact same profit.

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