Profit is an opinion, cash is a fact

A furniture maker has its best year ever. It sells 200 hand-made tables, the order book is full, the accountant confirms a healthy £30,000 profit. Three weeks later the same company can’t pay its staff and folds. Both facts are true at once. Understanding how they can both be true is the single most useful thing in this course — because it is the trap that sinks more good businesses than any other, and the one most often missed in the headlines.

Two different questions

There are two questions you can ask about a company’s year, and people constantly mistake one for the other.

The first: did it make a profit? Did the value of what it sold beat the cost of making it? This is the income statement — sales minus costs over a period.

The second: did cash actually pile up or drain away? Did more real money land in the bank than left it? This is the cash flow — the literal movement of pounds in and out.

You’d think these march together. They don’t. And the reason is one accounting choice that sounds dull and turns out to be the whole game: a sale is recorded when it’s made, not when the money arrives.

Profit is booked on a promise

When the furniture maker delivers a table and sends an invoice, it records the sale then — the day the table leaves, not the day the customer pays. The customer might pay in 90 days. Doesn’t matter for profit: the sale is “earned,” so it counts now. This is called accrual, and it’s how nearly every company keeps its books, for good reasons — it matches the sale to the work that made it.

But notice what just happened. Profit went up the moment the table was delivered, on the strength of a promise to pay. No cash moved. The £500 sale is sitting in the profit figure while the actual £500 is still in the customer’s account. The company has booked the win and is still waiting for the money.

That’s why the saying runs: profit is an opinion, cash is a fact. Profit depends on judgement calls — when to count a sale, how to spread the cost of a machine over its life, what a half-finished job is “worth.” Cash depends on nothing. It’s the bank balance. It either went up or it didn’t.

A worked example: the furniture maker

Walk the best-ever year, slowly, in two columns.

The company sells 200 tables at £500 each. On the books that’s £100,000 of revenue. Each table costs £350 to make — wood, glue, the carpenter’s wage — all paid in cash as the work is done. Across 200 tables that’s £70,000 of costs, money genuinely gone.

Profit on paper: £100,000 − £70,000 = £30,000. Real. The accountant isn’t lying.

Now the cash column. The costs — £70,000 — were paid in cash, in full, through the year. The sales? The company’s customers (shops, offices) pay on 90-day terms, and because the orders rushed in late, 70% of that £100,000 is still unpaid on the last day of the year. So only £30,000 of cash has actually come in. The company started the year with £5,000 in the bank.

Cash at year-end: £5,000 + £30,000 in − £70,000 out = −£35,000.

Read that again. A £30,000 profit, and the bank account is £35,000 in the hole. Every table was sold at a real margin. The company is, on paper, thriving. And it cannot make payroll, because the money for 140 of those tables hasn’t arrived yet — while every sack of wood was paid for in cash months ago. Profitable and broke, in the same breath.

Why growth makes it worse

Here is the cruel twist, and the reason this trap catches good businesses, not failing ones. The faster the furniture maker grows, the worse the cash hole gets.

To sell more tables next year, it must buy more wood and pay more carpenters now — cash out today. The payment for those extra tables arrives 90 days later. So every step up in sales digs the cash hole deeper before it ever fills it. A shrinking, dying company often has plenty of cash (it’s collecting old invoices and buying nothing new). A booming one can starve. “Growing broke” is a real thing, and it’s why a company can post record sales in one breath and announce it’s run out of money in the next.

The fix isn’t mysterious — collect faster, hold less stock, keep a cash cushion, or raise money to bridge the gap (which is what the rest of this course is about). But you can’t fix a problem you can’t see, and the profit figure hides this one completely. A glowing income statement can sit on top of an empty bank account.

Reading the gap

This is why anyone who reads company news seriously looks at cash, not just profit. “Record profits, shares soar” and “the company has burned through its cash” can describe the same firm in the same quarter, and both can be true. A profit figure is a story the company tells about its year, assembled from defensible judgement calls. The cash figure is what’s left in the bank when the story’s over.

It should make you slower to trust a single number. A company is not “doing well” because one line on one statement is green. Profit tells you whether the business model works; cash tells you whether the business survives the wait to get paid. You can have the first without the second — and the graveyard of good companies is full of firms that had a wonderful year on paper right up to the morning the money ran out.