Profit is not cash (this kills businesses)

This is the lesson that saves real businesses. Read it twice.

A company can be profitable and still die. It happens constantly, and the founders are always baffled, because the spreadsheet said they were winning.

The pizza shop

You run a small pizza shop. In March:

• You sell $50,000 of pizzas to a big office client — on credit, payable in 60 days.
• Your costs (cheese, flour, staff, rent) were $40,000 — paid in cash, this month.

Your profit for March: $10,000. Excellent!

Your cash for March: you paid out $40,000 and received $0. You are down $40,000.

In April, rent is due. Staff want salaries. The cheese supplier wants paying. And your $50,000 doesn't arrive until May.

You are profitable. You are also out of business.

Why the two numbers differ

Three main reasons:

1. Timing (accruals). Accounting records a sale when you earn it, not when you're paid.

2. Buying things that last. You buy a $60,000 oven. That's $60,000 of cash gone today, but the P&L only shows a slice each year.

3. Stock. $20,000 of flour in the storeroom is cash you've already spent, but it isn't an expense until you sell the pizzas made from it.

The three statements, and what each one is for

Now you can see why there are three:

Beginners look at profit. Experienced people look at cash flow first, because that's the one that decides whether the doors open tomorrow.

The fix

The pizza shop's problem is solvable, and every fix is about timing:

• Ask for 50% upfront.
• Shorten payment terms from 60 days to 15.
• Negotiate longer terms with your own suppliers.
• Keep a cash cushion covering 3 months of costs.

None of that changes profit by a single rupee. All of it decides whether you survive.