At Parker, one of the most common questions we hear from business owners is:

"Why do I have so much profit on my P&L but no cash in the bank?" 

Every DTC founder and small business owner faces this challenge eventually — managing the tension between cash flow vs profit.

Entrepreneurs are often confused about the difference between cash flow and profit — especially those running startups or small businesses. This disconnect can lead to a situation where your business looks profitable on paper but struggles with cash flow problems, which ultimately stunts growth and threatens your business's survival.

In this article, we'll unpack this common pain point, explore the reasons behind it, and show how Parker Analytics (as one option) helps you navigate this challenge to make more informed business decisions for your ecom business. 

We'll also cover essential financial metrics and statements to give you a comprehensive understanding of cash flow vs profit.

Accrual vs. cash accounting: the root of cash flow vs profit confusion

At the core of all cash flow vs profit confusion is understanding the difference between accrual and cash accounting methods. These accounting methods affect how your financial statements are prepared.

• Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when money actually changes hands. So a $1,000 credit sale would immediately show as revenue and profit on the income statement, even if you don't have the actual cash from the customer yet.

• Cash accounting only logs transactions when payment is sent or received. That same $1,000 sale wouldn't be recognized on the cash flow statement until the cash is in the bank.

Why does this matter?

Let's say you make that $1,000 sale, but it costs you $800 upfront for inventory and shipping (cost of goods sold). Under accrual accounting, you just scored a $200 gross profit! But your cash reality is -$800 until that customer pays up. 

If your cash inflows and outflows don't line up, you can quickly find yourself with negative cash flow despite your accounting profits. This misalignment between profit and cash flow can be the kiss of death in ecom.

Types of profit vs cash flow

To better understand the cash flow vs profit dynamic, let's break down the types of profit and cash flow:

Types of Profit:

• Gross profit = sales revenue - cost of goods sold

• Operating profit = gross profit - operating expenses

• Net profit = operating profit - interest payments, taxes, and other expenses

Types of cash flow:

• Operating cash flow: cash generated from day-to-day business operations

• Investing cash flow: cash used for investing in assets and securities

• Financing cash flow: cash from financing activities, such as issuing stock or debt

• Free cash flow: operating cash flow - capital expenditures

Net cash flow is the sum of all these cash flows, representing the overall movement of cash in and out of the business over a specific period of time.

Ecom cash flow is complicated

Managing cash flow in e-commerce is notoriously tricky for four main reasons:

1. Inventory management: Keeping stock on hand is cash-intensive. You're often shelling out for products long before you make the sale. Forecasting demand is more art than science, so it's easy to over-extend.

2. Payment lags: There's a delay between making a sale and the cash hitting your account, especially if you offer payment plans or your processor takes their sweet time. More float, more problems. 

3. High acquisition costs: Ecommerce is extremely competitive. To succeed, you have to spend big to win customers. Customer Acquisition Cost (CAC) can outpace early returns, so you're in the red until your customer Lifetime Value (LTV) plays out.

4. Seasonality: Sales revenue goes up, sales revenue goes down, but your operating expenses don't care. Managing cash reserves to weather the slow times (and avoid overspending during the boom times) is a delicate balance.

Let's walk through a concrete example:

Let's say you need to buy $20,000 worth of inventory for future sales. On a cash basis, you're paying your manufacturer today, putting you in the hole for $20k even though you're still getting daily sales and showing accounting profits on your profit and loss statement. 

That new inventory takes a month to arrive. You could sell it for $40,000 and net a healthy $20,000 profit, but it will take another two months to actually sell through. So you're cash flow negative for a full quarter, even though you're profitable.

As you sell and receive cash from customers, you chip away at the $20,000 deficit in accounts payable. But in the meantime, you've lost $20,000 in liquidity that you can't deploy for growth or to smooth out other cash flow gaps. And this is just for one inventory buy!

For smaller brands without huge cash reserves, even one poorly-timed inventory purchase can become an existential crisis. Rinse and repeat this cycle, and it quickly becomes a cash flow disaster.

The bottom line? 

Cash flow management is a moving target. It's hard. But you can't afford to just wait and see – you need a proactive plan to successfully manage your cash cycle and stay ahead. 

Empowering your cash flow management with Parker Analytics

At Parker, cash flow is our love language. It's why we get up in the morning. We're on a mission to help ecommerce founders take control of their cash and make confident, data-driven decisions to drive profitability and maintain positive cash flow.

Parker Analytics is the financial operating system for your ecommerce business. By integrating data from all your critical systems – Shopify, Amazon, Facebook Ads, Google Analytics, your bank accounts, and more – we give insights into your cash cycle and overall financial performance. 

Parker Analytics helps you answer questions such as:

• Does my unit economics per sale make sense? Our real-time P&L dashboard shows your true profitability, not vanity metrics. We factor in details like COGS, shipping, discounts, and returns to show you if you're really in the black. If your contribution margins are near or below 0, then it's time to reassess the business regardless of its capital structure.

• Where's my cash really going? With our Cash Flow module, you can visualize your cash inflows and outflows in one place. No more logging into separate accounts to piece it together. See exactly where you're spending and spot cash sinkholes before they create problems.

• Are these customers even worth it? Not all customers are created equal. Parker's LTV reporting and acquisition insights reveal exactly which channels and cohorts are driving real profits (or dragging you down).

• What should I actually be selling? We give you SKU-level analytics on your product margins, factoring in all the costs that usually get buried. See your portfolio's true performers and hidden money pits at a glance.

Parker empowers you with visibility and control over your finances, without requiring you to be an accountant. By integrating key financial functions, we eliminate messy data and streamline money management, giving you the insights to manage your cash and profit effectively.

Our goal is to let you focus on your strengths — creating amazing products and customer experiences — while we optimize your finances behind the scenes. 

FAQ: Cash flow vs profit

Q: Can a business be profitable but have negative cash flow?

A: Yes, this situation is quite common, especially in ecommerce businesses. For example, let's say you run an online store selling handmade furniture:

• You receive a large order for $50,000 worth of custom tables.

• You record this $50,000 as revenue immediately (assuming accrual accounting).

• After subtracting your costs, you show a profit of $20,000 on your income statement.

• However, you need to buy $30,000 worth of materials upfront and pay your workers.

• The customer won't pay until the order is complete in 2 months.

In this scenario, you're profitable on paper but could face a cash flow crunch in the short term. This is why many businesses use tools to forecast and manage their cash flow alongside profitability.

Q: Is cash flow more important than profit?

A: While both are crucial, cash flow often takes precedence in the short term, especially for small businesses and startups. Here's why:

• Immediate survival: You need cash to pay employees, suppliers, and keep the lights on. Profit doesn't help if it's tied up in accounts receivable or inventory.

• Growth opportunities: Cash allows you to seize time-sensitive opportunities, like bulk inventory discounts or marketing promotions.

• Investor and lender confidence: Consistent positive cash flow can make your business more attractive to potential investors or lenders.

However, long-term profitability is essential for sustainable business growth. Ideally, you want to achieve both positive cash flow and profitability.

Q: How can a business improve its cash flow?

A: There are several strategies an ecommerce business can employ to enhance cash flow:

1. Optimize inventory management: Use data analytics to forecast demand accurately and avoid overstocking.

2. Improve accounts receivable: Offer discounts for early payments or implement stricter payment terms.

3. Negotiate better terms with suppliers: Try to extend payment terms or secure volume discounts.

4. Utilize cash flow forecasting tools: Platforms like Parker Analytics can help predict and manage cash flow cycles.

5. Consider factoring or invoice financing: These options can provide immediate cash for outstanding invoices.

6. Implement a cash reserve: Set aside a portion of profits during high seasons to cover expenses during slower periods.

For example, if you run a seasonal business like a swimwear brand, you might negotiate longer payment terms with suppliers during your off-season and build up a cash reserve during peak months to smooth out your cash flow throughout the year.

Q: What's the difference between the income statement and the statement of cash flows?

A: These two financial statements provide different but complementary information:

Income Statement:

• Shows revenues, expenses, and profitability over a specific period.

• Uses accrual accounting, recording transactions when they occur, not when cash changes hands.

• Includes non-cash items like depreciation and amortization.

• Example: A $10,000 sale on credit appears as revenue, even if you haven't received the cash yet.

Statement of cash flows:

• Shows actual cash inflows and outflows during a period.

• Divided into operating, investing, and financing activities.

• Excludes non-cash transactions.

• Example: That $10,000 credit sale wouldn't appear until the customer pays.

Understanding both statements gives a complete picture of your business's financial health. Additionally, the balance sheet complements these by showing a snapshot of your assets, liabilities, and equity at a specific point in time.

Q: How do depreciation and amortization affect cash flow vs profit?

A: Depreciation and amortization are non-cash expenses that reduce profit but don't affect cash flow:

• On the income statement: They decrease profit by spreading the cost of assets over their useful life.

• On the cash flow statement: They're added back to net income when calculating operating cash flow.

For example, if your ecommerce business buys a $50,000 delivery truck with a 5-year useful life:

• Income statement: You'd record $10,000 in depreciation expense each year, reducing your profit.

• Cash flow statement: You'd see a $50,000 cash outflow in year 1 (under investing activities), but the annual $10,000 depreciation wouldn't affect cash flow.

This is why businesses with high depreciation (like those with significant physical assets) might show lower profits but have stronger cash flow.

Q: What does it mean to be cash flow positive?

A: Being cash flow positive means that the amount of money coming into your business from operating activities exceeds the amount going out over a specific period of time. This is crucial for maintaining day-to-day operations and meeting your financial obligations. A cash flow positive business can pay its bills, invest in growth, and handle unexpected expenses without relying on external financing.

Wrapping up

Understanding the nuances of cash flow vs profit is crucial for making sound business decisions and ensuring the long-term financial health of your company. While showing a profit is important, having enough cash to keep your business running smoothly is equally, if not more, critical.

If you're an ecommerce founder struggling to manage your cash flow and profitability, check out what we're building at Parker.