Cash Flow vs. Profit in Canada: What’s the Difference? (And Why Both Matter)
Cash Flow vs. Profit in Canada: What’s the Difference? (And Why Both Matter)
Why Your Business Can Be “Profitable” but Still Broke
One of the biggest surprises for new and seasoned business owners alike is discovering that you can be profitable on paper while your bank account is gasping for air. I’ve seen business owners celebrate a substantial year-end profit - only to panic a week later when they couldn’t cover payroll or their HST payment.
It’s confusing, frustrating, and incredibly common. And honestly? It’s one of the main reasons I spend so much time teaching the difference between profit and cash flow.
Profit tells you how your business is performing.
Cash flow tells you whether you can survive another month.
Both matter - but they are not the same thing. Let’s break down the difference in plain language (because the accounting world loves to overcomplicate it), explore why they don’t always match, and talk about how you can strengthen your cash position which will help you get off of the feast-or-famine rollercoaster.
Profit: The Income Statement View of Your Business
Profit is what most people think of when they think of “success.” Did your business make money? Did you spend less than you earned? The standard calculation is:
Revenue – Expenses = Profit
But here’s where it gets tricky: profit includes non-cash items and follows accrual accounting, not real-life cash movement.
Profit Includes Non-Cash Expenses
Some of your “expenses” aren’t actual cash leaving your bank account. An example of this would be the depreciation expense booked under accrual accounting to represent the gradual write-off of equipment.
These items reduce your profit, but they don’t reduce your cash.
Accrual Accounting vs. Real Life
Accrual accounting means:
You record income when it’s earned, not when payment from your customer is received
You record expenses when they’re incurred, not when they’re paid
So yes - you can “earn” a big contract in January, recognize all that revenue, celebrate the profit… and still be broke in March because the client hasn’t actually paid you yet.
CRA Tie-In
Most incorporated businesses - and many self-employed people - are required by the CRA to use accrual accounting, not cash accounting.
If you’re curious, the CRA outlines this here: CRA: Accounting for your earnings
This is one reason why so many business owners mistakenly think they’re doing well - because profit reflects the full value of the work done, even if it's unpaid.
But your profit and your bank balance do not always agree.
Cash Flow: The “Cash in Real Life” View
Cash flow is exactly what it sounds like: the flow of cash in and out of your bank account. It is not concerned with accounting rules, accrual timing, or non-cash adjustments.
It answers the question: Can you pay your bills today?
Cash Flow Includes Things That Don’t Affect Profit
This is where business owners often get tripped up. Cash flow includes items that the profit calculation ignores, such as:
Loan payments
Owner withdrawals
Income tax payments
HST remittances
Equipment purchases (in profit, you depreciate these slowly; in cash flow, you pay for them upfront)
These can drain your bank account even if your financial statements show a nice profit.
Why Profit and Cash Flow Don’t Always Match
If you’ve ever wondered why your accountant says you made money while your bank says otherwise, here are the usual culprits:
1. Unpaid Invoices (Accounts Receivable)
You can be profitable on paper, but broke in your bank account if clients take forever to pay.
If you invoice $10,000 in April for work to be completed in April, it counts as revenue immediately under accrual accounting. But if the client doesn’t pay the invoice until July? Your profit looks great in April - but your cash flow does not.
And if you never follow up on overdue invoices? That’s a double hit:
Your profit includes income you’ll never see
Your cash flow stays dry
2. Inventory or Equipment Purchases
Profit spreads the cost of equipment over several years (depreciation).
Cash flow hits the full cost today.
Example:
You buy a $5,000 machine.
Profit might show only a $1,000 depreciation expense this year.
Cash flow shows a full $5,000 leaving your bank account.
Same business. Two completely different stories.
3. Loan Payments and Debt Servicing
Loan principal is not an expense, so it doesn’t reduce profit.
But you pay it in cash, so it absolutely affects liquidity.
Many business owners fall into the trap of “We’re profitable, so we’re fine,” without realizing that debt repayments are eating their cash alive.
4. Owner Withdrawals Aren’t Tracked Properly
I see this constantly.
Owner draws are not expenses.
So they don’t lower your profit.
But they absolutely lower your cash flow.
If you’re not tracking what you take out, you will always be puzzled about where the money went.
Why Both Profit and Cash Flow Matter
This isn’t an either/or situation - you need both.
Profit = Long-Term Viability
Profit shows whether your business model works sustainably.
If you’re never profitable, eventually something breaks.
Cash Flow = Short-Term Survival
Cash flow tells you whether you can:
pay suppliers
cover payroll
remit HST
keep the lights on
make loan payments
A profitable business can still go bankrupt if its cash flow is poorly managed.
Lenders and Investors Look at Both
Banks, lenders, and potential investors usually ask for:
Financial statements (profit-based)
Cash flow statements
Forecasts
Why? Because they want to know two things:
Will you survive the short-term?
Will you thrive long-term?
How to Improve Your Cash Flow: Practical Tips That Actually Work
Here’s the good news: improving cash flow doesn’t always require massive changes. Small, consistent actions can completely shift your cash position and reduce stress.
1. Invoice Promptly - and Follow Up Relentlessly
This is the #1 issue I see.
If you don’t invoice promptly, your clients won’t pay promptly.
And yes - you absolutely need to follow up on unpaid invoices.
It’s not rude. It’s business.
In fact, if your industry will allow for you to do so, I would encourage you to receive payment upfront before you do the work. If this is not possible, time the payment schedule to coincide with the progress of the work as closely as possible.
To make this easier, I’ve created the following templates:
2. Offer Early Payment Incentives
Want clients to pay quickly? Give them a reason to.
Example:
“Take 5% off if paid within 10 days.”
This can significantly accelerate cash flow - especially with large invoices.
3. Keep HST and Tax Money in a Separate Account
This is one of my favourite business hacks.
When you collect HST, that money is not yours. It belongs to the CRA.
If it sits in your operating account, it looks like money you can spend - and many business owners accidentally spend it.
Set up a separate account and transfer the HST (and tax instalments) weekly or monthly. Your future self will thank you.
4. Create Monthly or Quarterly Cash Flow Forecasts
Cash flow forecasting helps you:
anticipate shortfalls
plan for slow seasons
schedule large purchases
avoid surprise HST or payroll payments
You don’t need anything fancy - a simple spreadsheet works.
The goal is awareness. When you know what’s coming, you can plan for it.
5. Price Your Work for Both Profit AND Cash Flow
Using tools such as:
… helps you price your services with a complete understanding of:
labour costs
overhead
future cash needs
upcoming commitments
Profitability without cash flow awareness is a trap.
Your pricing should protect both.
Key Takeaways
Profit measures performance.
Cash flow measures liquidity.
You need both to run a healthy, sustainable business.
Profit can say you’re thriving while your bank account screams otherwise.
That disconnect is standard - but it’s preventable with awareness and structure.
If you’re struggling to understand your profit, your cash flow, or why they never seem to match, let’s talk. Reach out HERE to connect - I can help you get clarity on what your