Cash Flow vs Profit: Why Startups Can Be Profitable AND Running Out of Cash
Collated by Paul Jung, CFA
Curated by Rubric Financial
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The Two Numbers That Diverge
- NET INCOME (profit) is a GAAP construct measuring revenue recognized minus expenses incurred, regardless of when cash moves.
- CASH FLOW measures the actual movement of money in and out of the company over a period.
- These diverge because GAAP recognizes revenue and expenses on an accrual basis: you can book revenue for services not yet paid for, and recognize expenses for bills not yet paid. The accounting reality differs from the cash reality.
- Classic case: a SaaS company books $500K of annual contracts in December, recognizes $42K of revenue (1/12), but collects $0 of cash because all invoices go out Net-30 in January. Highly profitable on paper, $0 of incremental cash.
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