Sixty thousand dollars, and where is it?: In 2025 Lena's Bakery Ltd made a profit for the period of $60,000. On 31 December Marco opens the bank account and finds $25,000, with another $15,000 borrowed on the overdraft.
'So where is it?': 'We made sixty thousand,' he says to Lena. 'So where is it?'
Nothing has gone missing. Profit and cash are two different measurements, and they rarely match.
Profit is what is left of revenue once costs are taken away, over a period such as a year (3.3.3). It is counted when the bread is sold and when the flour is used, whether or not any money has changed hands yet.
Cash flow is the money actually coming into the business (cash inflows) and going out of it (cash outflows) over a period. It is counted on the day the money moves: when a customer pays, when a supplier is paid.
Profit
- What it measures. Whether the business earns more than it spends: revenue minus costs.
- When a sale counts. When the bread is delivered, even if the hotel pays next month.
- Where it shows. In the profit and loss account (3.4.1).
- What it tells Lena. Whether baking and selling bread is worth doing at all.
Cash flow
- What it measures. The money moving into and out of the bank account.
- When a sale counts. When the hotel's money arrives.
- Where it shows. In the bank account, day by day.
- What it tells Lena. Whether she can pay what is due this week.
Bills are paid in cash, not in profit: About $29,100 leaves the bakery every week (3.1.1). Wages go out every Friday, and Valley Grain expects its money 30 days after each delivery of flour.
None of that can be paid with profit on paper.
A missed bill can close a business: A business that cannot pay a bill when it falls due can be taken to court and closed by the people it owes, however good its profit looks.
So a business needs both. Over the years, a business that never makes a profit runs out of money: it spends more than it earns. But in any one week, it is cash that decides whether the wages are paid. A business can look profitable in its accounts on the day it closes: it ran out of cash first.
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Why do the two numbers drift apart? Follow Lena's Bakery through one month, April 2026, and look at each event twice: once for what it does to profit, once for what it does to the bank account.
| What happens in April | Effect on April profit | Effect on April cash |
|---|---|---|
| The Harbour Hotel is supplied with $6,000 of bread, invoiced at the end of April and paid at the end of May | Up $6,000: the sale counts when the bread is delivered | No change: the $6,000 arrives in May |
| A $9,200 delivery of flour from Valley Grain, paid 30 days after delivery | Down $9,200 as the flour is baked and sold | No change: Valley Grain is paid in May |
| A second deck oven for Mill Lane, $45,000, paid on delivery | Not cut by $45,000: the oven is an asset kept for years, not a cost of one month (3.1.2) | Down $45,000 the day it is paid |
| The 2025 dividends, $30,000, paid to Lena, Marco and the cousin | No change: dividends are paid out of profit already made | Down $30,000 |
| Farida Rahman's offer is accepted: $120,000 for 400 new shares (3.2.2) | No change: money from new owners is not revenue | Up $120,000 |
Four reasons profit and cash drift apart
- Selling on credit. The sale counts in profit now; the cash arrives when the customer pays. The cafés and hotels owed the bakery $40,000 at the end of 2025.
- Buying on credit. The cost counts in profit when the flour is used; the cash leaves when the supplier is paid. This one helps cash, which is why the bakery pays Valley Grain after 30 days.
- Buying assets. An oven, a van or a new shop takes all its cash at once, but it is not taken off one year's profit in one go, because it is used for years.
- Money that is neither revenue nor cost. A bank loan or new shares bring cash in without adding to profit. Repaying a loan and paying dividends take cash out without cutting profit; only the interest on a loan is a cost.
It works the other way round too: January is the bakery's quietest month. Suppose it makes a small loss in January, and in the same month Farida's $120,000 arrives.
The profit and loss account shows a loss. The bank account has never looked better. Plenty of cash says nothing about whether the business is earning its keep.
Leave Farida's offer aside, and April could be a month in which the bakery makes a profit and still watches $75,000 leave the bank for the oven and the dividends, while $6,000 it has earned sits in the Harbour Hotel's account until May.
Read each number for what it is: A profitable business can run short of cash, and a business with plenty of cash can be making a loss.
Profit answers 'is this business worth running?'. Cash flow answers 'can it pay what is due?'. Never read one as the other.
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The bakehouse, from the first payment to today: Three shops each baking their own bread was costly, so Lena and Marco built one bakehouse on Mill Lane to bake for all of them (1.4.3).
It cost $600,000, and $400,000 of that was borrowed from the bank.
Spending now on something that should earn money for years to come is investment. Follow the bakehouse's money and you see how investment, profit and cash flow are tied together.
One investment, three numbers
Cash goes out first
The whole $600,000 was paid before the bakehouse baked a loaf: $400,000 from the bank, the rest from the company's own money. A huge cash outflow, while profit was barely touched, because the bakehouse is an asset used for many years.
Profit rises later
Baking in one place costs about $90,000 a year less than three shop ovens did (3.1.1), so profit is higher every year the bakehouse runs. The loan's interest, $10,000 a year, is a cost that takes a little of that back.
Profit turns into cash
The saving arrives week by week as lower bills, so cash improves too. Part of it repays the loan: $50,000 so far, with $350,000 still owed. Repayments take cash but are not a cost, so they do not reduce profit.
Profit pays for the next investment
Profit kept in the business (retained profit, 3.2.1) pays for the next oven or shop. The bakery's retained earnings of $150,000 are not in the bank: they are in the bakehouse, the ovens and the vans.
The relationship in three lines
- Investment takes cash now and should raise profit later. In the first months profit can even dip, as new costs and interest arrive before the extra sales.
- Profit becomes cash only when customers pay. A successful investment brings cash back over several years, not at once.
- Profit pays for investment. Retained profit funds the next one, and a record of profit is what persuades a bank or an investor to put in the rest.
Now the plans for 2026. A fourth shop on Station Road will cost $120,000 and the second deck oven $45,000: $165,000 of cash, against $25,000 in the bank at the end of 2025 and $15,000 of overdraft still unused. Both are sensible investments that should raise profit in later years. But the cash is needed now, so the bakery has to find finance before it spends (3.2), or the investments themselves could leave it unable to pay Friday's wages.
In the short term
- Cash falls sharply: the whole price is paid at the start
- Profit may dip: set-up costs, new wages and interest arrive before the extra sales
- The business may need a loan or new shares to pay for it
In the long term
- Revenue rises or costs fall, so profit rises year after year
- Cash flows back in as customers pay, until it covers what was spent and more
- Retained profit from it pays for the next investment
Investment is not a cost of one year: A $45,000 oven paid this month takes $45,000 of cash this month, but it is not taken off this month's profit in one go.
That is why
- A business that invests heavily can show a healthy profit and an empty bank account in the same year.
- An investment that works still leaves a gap of months or years before its cash comes back.
How this comes up: Profit and cash flow come up in short questions, in questions on a case, and inside longer finance questions.
Short questions
- Define cash flow, for two marks.
- Explain the difference between profit and cash flow, for two.
With a case
- Explain why a business that makes a profit cannot pay its suppliers.
- Explain the relationship between investment, profit and cash flow for a named business, for four.
Inside longer questions: In longer finance questions the case gives you both numbers and expects you to see why they differ.
The four-mark pattern
- Investment takes cash now. Spending on assets that earn over future years is a large cash outflow at the start. Give the case's figure.
- Profit comes later. A successful investment raises revenue or cuts costs, so profit rises in later years; at first it may dip.
- Profit becomes cash. Profit improves cash flow only when customers pay, and retained profit pays for the next investment.
- Use the case all the way through. Each link with a name or a number from the business.
Two traps
- Profit is not cash. 'The investment raises profit, so it raises cash' skips the timing: cash leaves before any profit is made, and profit turns into cash only when customers pay.
- Nothing from the case. A chain that would fit any business stops at two. Put the bakery's $165,000, its $25,000 in the bank and the bakehouse's $90,000 a year into the links.
With reference to Lena's Bakery Ltd, explain the relationship between investment, profit and cash flow.
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