Understanding the differences between cash flow and your profit and loss is important for any business owner.

While both metrics are important for financial management, they serve different purposes.

Your profit and loss statement (also called an income statement) tells you whether you’re making money, but your cash flow determines whether you can pay your bills.

One of the biggest mistakes business owners make is assuming they won’t run into cash flow issues if they are profitable.

However, poor cash flow management can shut down even a profitable business without enough liquidity to cover operating expenses.

This guide will explain the differences between cash flow and your profit and loss. Why both are important and some common cash flow traps. Including high-interest loans from companies like Forward Financing, Square, and PayPal, that can hurt your business in the long run.

What Is Cash Flow?

Cash flow refers to the movement of money in and out of your business. It tracks how much actual cash is available at any given time.

A cash flow statement is broken down into three sections:

1. Operating Activities – The money spent on or received from regular business activities (e.g., sales, paying suppliers, payroll).
2. Investing Activities – Money spent on or received from investments, such as buying equipment or selling assets.
3. Financing Activities – Loans, repayments, and owner contributions or withdrawals.

A business with positive cash flow has more money coming in than going out, which ensures bills, payroll, and other expenses can be covered.

A business with negative cash flow may struggle to meet financial obligations, even if it is technically profitable.

Here is an example of the Statement of Cash Flows report in QuickBooks Online:

What Is a Profit and Loss Statement?

A Profit and Loss (P&L) statement measures business profitability over a specific period (monthly, quarterly, or yearly). It includes:

• Revenue – Total income from sales and other sources.
• Cost of Goods Sold (COGS) – Direct costs of producing goods or services.
• Operating Expenses – Rent, payroll, marketing, and other costs.
• Net Profit or Loss – The final number after subtracting all expenses from revenue.

A positive net profit means the business is making money.

A negative net profit (a loss) indicates the business is operating at a deficit.

However, profit does not mean you have cash in the bank.

Even if a business is profitable on paper, if customers don’t pay invoices on time or expenses exceed available cash, cash flow problems can arise.

Here is an example of the Profit and Loss report in QuickBooks Online:

Key Differences Between Cash Flow and Profit and Loss

Both cash flow and profit and loss reports are important for running a business, but relying on just one can lead to financial trouble.

Why a Profitable Business Can Still Have Cash Flow Problems

A business can be profitable but still run out of money. Here’s why:

1. Slow Customer Payments

If customers take 30, 60, or even 90 days to pay invoices, your business may not have the cash to cover expenses.

2. Inventory and Equipment Purchases

Spending a large sum on inventory or equipment can cause temporary cash shortages, even if the expense is justified.

3. Loan Payments

Loan principal payments do not appear on a profit and loss statement but reduce cash flow when paid. This is a major issue for businesses that take out loans without considering the impact of repayment.

4. Overexpansion

Expanding too quickly—hiring too many employees, opening a new location, or spending too much on marketing—can strain cash flow even if the business is generating a profit.

Why Revenue Based Financing Can Ruin Your Cash Flow

Many business owners, struggling with cash flow, turn to revenue-based financing from companies like Forward Financing, Square, and PayPal because these loans are easy to obtain and don’t require strong credit.

Unlike traditional loans with fixed monthly payments, revenue-based financing automatically deducts a percentage of your daily sales to repay the loan.

While this repayment structure may seem flexible, it can severely impact your cash flow, especially during slow months.

1. Payments Are Tied to Sales, Not Profitability

Unlike a traditional loan, where you make a fixed payment each month, revenue-based financing takes a percentage of your sales regardless of your expenses.

• If you have a slow month, you still lose a portion of every sale.
• If your profit margins are thin, these deductions can leave you with almost no cash for operations.
• For example, if Square deducts 15% of your daily sales, you may struggle to cover payroll, rent, and supplier costs.

2. The More You Sell, The Faster They Take Your Money

One of the major downsides of revenue-based financing is that there’s no benefit to strong sales—your lender takes a bigger chunk.

• If you have a great sales month, instead of reinvesting profits into growth, a larger portion of your revenue is immediately deducted for loan repayment.
• You can’t control your repayment schedule—even if you want to slow down payments to manage expenses better.
  With a traditional loan, you might have the flexibility to defer an extra payment or refinance. With revenue-based financing, your lender takes their cut no matter what.

3. Hidden Costs Make It More Expensive Than It Seems

While revenue-based financing may not have a traditional APR, the total cost of these loans can still be much higher than a standard small business loan.

• Factor Rates Instead of Interest Rates: Instead of an annual percentage rate (APR), these loans use a factor rate, meaning you repay a fixed multiple of what you borrowed. A loan with a 1.4 factor rate means you must repay $14,000 on a $10,000 loan, regardless of how fast you pay it back.
• No Benefit to Early Repayment: Unlike traditional loans, where early payments reduce interest costs, revenue-based financing requires you to pay the full amount no matter how quickly you pay it off.

Many business owners don’t realize how costly these loans are until their daily revenue is drained at an unsustainable rate.

4. Cash Flow Becomes Unpredictable

Because payments are taken as a fixed percentage of revenue, your available cash fluctuates unpredictably.

• In months when sales are high, more money is deducted, leaving less for reinvesting in your business.
• In slower months, you still lose a percentage of every dollar you make, even if you’re barely covering expenses.

How to Improve Cash Flow Without Risky Loans

Instead of relying on revenue based loans, consider these strategies:

1. Improve Invoice Collections:

   • Offer early payment discounts.
   • Use automated invoicing software to send reminders.
   • Charge late fees on overdue invoices.

2. Negotiate Better Payment Terms:

   • Ask suppliers for extended payment terms (e.g., Net 45 or Net 60).
   • Reduce inventory costs by ordering only what’s needed.

3. Build a Cash Reserve:

   • Set aside a percentage of profits for emergencies.
   • Reduce unnecessary expenses to increase savings.

4. Explore Low-Interest Financing Options:

   • Look for SBA loans or lines of credit with reasonable interest rates.
   • Consider working with a local credit union instead of alternative lenders.

Managing Cash Flow and Profit Effectively

Understanding cash flow and profit and loss reports is important for long-term business success.

While profitability ensures the business makes money, cash flow determines whether you can pay your bills.

Key Takeaways:

• Profit and loss statements show profitability, while cash flow statements show liquidity.
• A business can be profitable but still struggle with cash shortages.
• High-interest loans may seem like quick solutions but can harm long-term cash flow.
• Smart financial management, including better invoicing practices and controlled expenses, helps improve cash flow without resorting to risky financing.

If you’re struggling with cash flow, focus on managing receivables, negotiating supplier terms, and cutting unnecessary expenses before taking on expensive debt.

If you need help understanding your Statement of Cash Flows or Profit and Loss Report in QuickBooks Online, click the green button below to schedule a FREE discovery call.