Sales Are Not Cash

A business can sell a product today and receive the money later. That is why sales and cash are not always the same. Sales describe what the business has sold. Cash tells us what money is actually available. A busy shop can still have trouble paying its bills.

Consider a made-up business with nine hundred dollars in completed sales and six hundred dollars in expenses. For this simple example, there are no other costs. It has made a profit of three hundred dollars. But suppose customers have paid only two hundred dollars so far, while the business has already paid all six hundred dollars in expenses. Its cash has gone down by four hundred dollars.

The business must therefore watch two things: whether its work makes a profit, and when money comes in or goes out. A record of cash flow helps answer the second question. More sales can be good news, but payment dates still matter.