How can a profitable business run out of money?
A sale can improve the income statement long before the money reaches the bank. Follow one invoice to see the difference.
In this story
The sale is made. The work is done. The customer is happy. There is just one detail: half the invoice has not been paid.
That gap can make profit and cash flow tell very different stories about the same period. The income statement measures revenue earned and expenses incurred; the cash flow statement shows where cash came from and where it went. [1]
Start with one invoice.
Imagine a small design studio. This month it completes a $100 project. Its customer pays $50 now and owes the remaining $50. The studio incurs—and pays—$70 in operating expenses.
We will assume there are no taxes, non-cash expenses or other transactions. The project is complete, so all $100 is earned revenue. Subtract the $70 expense and the studio reports $30 in profit.
The unpaid portion of the invoice is recorded as accounts receivable: an amount the customer owes. It is an asset, but it has not yet become cash.
Now follow the cash.
Only $50 entered the bank account. Meanwhile, all $70 of expenses had to be paid. The studio’s operating cash flow is therefore negative $20.
If the studio started with $40 in cash, it would finish with $20. The owner could point to a profitable month and still have less money available for next month’s bills. Both statements would be true.
Make the two numbers meet.
Start with the $30 profit. It includes $50 of revenue that has not been collected, so remove that amount to arrive at operating cash flow: $30 − $50 = −$20.
This is the logic behind adjusting profit for changes in operating assets and liabilities. Real cash flow statements also account for non-cash items and other adjustments. Investing and financing activities are reported separately. [1]
Next month, suppose the customer pays the final $50 and nothing else happens. Cash increases by $50, while no new revenue is earned from that payment. The receivable has simply turned into cash. The revenue belonged to the earlier month, when the work was completed.
A profitable sale can still leave a bill to fund.
Ask what changed.
A gap between profit and cash flow is a question to investigate. In our studio, payment timing explains it. If the customer never pays, the situation changes again: the studio may have to recognize a loss on the receivable.
The useful next step is to trace the difference. Was more cash tied up in unpaid invoices? Was inventory purchased? Were suppliers paid later? Looking at those changes makes the relationship between the statements much easier to understand.
Count the cash that actually moved.
An illustrative question, not an assessment of exam readiness. Your answer stays on this page and is not saved.
Sources & notes
Sources checked 7 September 2026. Numerical examples and learning questions are original illustrations by The Margin. Historical events are identified by their event dates.
