Beginner level · Module 3: Income Statements and Cash Flow · Lesson 2 of 3
Profit Is Not Cash
Understand why a profitable organisation can still run out of cash.
In this lesson you will
- Explain timing differences between profit and cash
- Identify common causes of cash shortages
Key concepts
credit salescredit purchasesstocktiming
The lesson
Profit counts sales when made, even if customers pay later; cash counts money when it arrives.
Cash is tied up in stock, unpaid customer accounts and equipment purchases, while loans repaid reduce cash without being an expense.
A growing business often needs more cash for stock and credit before profits arrive.
Step by step
- List transactions that affect profit but not cash.
- List those that affect cash but not profit.
- Explain a case of a profitable shop short of cash.
- Suggest remedies.
Practice activity
Explain the difference between the shop's profit and its cash movement this month.
Expected result: A clear reconciliation of the main differences.
Check your understanding
-
Does a credit sale increase cash immediately?
Show answer
No, cash increases only when the customer pays.
-
Give one cause of cash shortages in a profitable business.
Show answer
Cash tied up in stock or unpaid customer accounts.
Taught live by an instructor — online or in person. Free course lessons are for self-study and do not lead to a certificate — see registration options.