Cash Flow vs Profit -
It was a breezy Wednesday afternoon when CA Srini stepped into the corporate office of PSM Industries, a mid-sized engineering company that had been a loyal client of S&Co for over 15 years. The quarterly financial review meetings were usually routine affairs - updates on tax planning, compliance deadlines, profitability analysis, and future projections. But today felt different.
Mr. Santosh, the company’s managing director, greeted Srini with a smile that barely masked his concern.
“Srini, let’s get straight to it,” he said as they settled in the conference room. “Our books show a decent profit for the last two quarters. Yet, we’re constantly struggling to make timely payments to vendors and service EMIs. Frankly, I’m worried.”
Srini leaned forward, immediately sensing the gravity of the issue.
“Santosh sir, you’re not alone. Many profitable companies struggle with the same problem. It’s time we speak about something fundamental - the difference between cash flow and profit.”
Mr. Santosh nodded. “Please explain.”
Srini pulled out a notepad and began sketching rough numbers. “Your profit and loss statement shows your income minus expenses. It accounts for credit sales, depreciation, and non-cash items. But it doesn’t always reflect how much cash actually flows in or out of the business.”
He continued, “Take credit sales for example. You may have booked ₹1 crore in sales, but if ₹60 lakhs is still stuck in receivables, that’s not money in your bank. Similarly, depreciation is shown as an expense, reducing profit - but it doesn’t involve actual cash outflow.”
Mr. Santosh listened carefully. “So, profit can exist only on paper?”
“In many cases, yes,” Srini said. “Profit tells you if the business is viable. But cash flow tells you if it's sustainable.”
He then showed Mr. Santosh the cash flow statement they had prepared. “Look at this. Despite profits, your working capital is strained. Collection cycles are stretching. Vendor payments are delayed. You’ve purchased new machinery worth ₹30 lakhs from reserves - good for long-term growth, but it has tightened your short-term liquidity.”
“I see,” said Mr. Santosh, now deep in thought. “We’ve been chasing topline and margin improvements, but not monitoring how quickly money comes in and goes out.”
Srini added, “That’s where cash flow management comes in. You need to track operating cash flow monthly. Set targets for receivable days. Align purchases with expected inflows. And yes, plan large capital expenses with buffer, not optimism.”
By now, Mr. Santosh had a notepad
of his own. “This explains why our salary payments were delayed last month,
despite showing a quarter-end profit. This is serious.”
Srini smiled reassuringly. “You have a good business. But now, it’s time to integrate cash flow consciousness into your management. We’ll help you implement a system - budgeting, projections, and reviews - so you always know the liquidity position, not just profitability.”
As the meeting drew to a close, Mr. Santosh shook hands with a firmer grip. “Thanks, Srini. This wasn’t just a routine meeting - it was a wake-up call.”
To sum up, for every business owner, understanding the difference between profit and cash flow isn’t just accounting jargon - it’s the difference between growth and a cash crunch. Never let profits on paper blind you to the reality of cash in hand.