Why ‘Profit’ Doesn’t Equal ‘Cash’: A Guide for Service-Based Business Owners

If you’re like most owners of a construction or professional services business, you keep an eye on your P&L every month. You see healthy revenue. The bottom line shows profit, but sometimes you still feel the pinch. Maybe it is during a payroll week, or near month end when more vendor/subcontractor bills are due and you see yourself dipping into that credit line a little more often that you would like.

It’s one of the most common frustrations of small business owners: “We’re making money on paper, but there’s never enough cash in the bank.”

The truth is, profit doesn’t equal cash.  I’m going to let that sit with you for a moment.

Understanding the difference between profit and cash and how your business converts from the prior to the later is a critical lesson for every small business owner. Without that understanding, you could be in for a painful surprise.

Let’s unpack what’s going on behind the scenes, why it matters, and what you can do about it.

Profit vs. cash: why the confusion?

Most business owners are wired for action. You’re focused on projects, people, deadlines, and keeping clients happy. Financial metrics like “net profit” or “cash flow” get lumped together, often treated like interchangeable terms.

They’re not.

Profit is what’s left over after you subtract your expenses from your revenue. But that’s just one piece of the puzzle.

Cash is what’s actually in your bank account and available to spend. It’s what pays your bills, employees, taxes, and keeps your business running.

In other words, your P&L might say you made $400,000 in profit this year. But your bank account tells another story, one that might show a balance of just $12,000, or worse, a negative overdraft.

The gap between profit and cash is more than a number, it is a measure how efficient the cash conversion cycle is for your company (which we will talk about in a moment). For small and mid-sized firms, particularly in project-driven or service-based sectors, it can also be the difference between growth and chaos.

Let’s talk accounting: accrual vs. cash

Part of the confusion starts with how accountants and accounting systems report results.

Most businesses, including those in the construction or professional services space use accrual basis accounting, which is the most widely adopted accounting method across Canada and the United States. It’s required if you carry inventory or earn revenue before getting paid. But it also comes with a downside: it can make you feel richer than you actually are.

Here’s how it works:

• Accrual accounting records revenue when it’s earned, not when cash is received. Likewise, expenses are recorded when incurred, not when they’re actually paid.

• Cash accounting records transactions only when money changes hands.

Let’s look at an example.

Say you complete all of the work for a $250,000 consulting project in June and issue the invoice. Your P&L now shows $250,000 in revenue for June. But if the client doesn’t pay until September, that’s three months where that $250,000 is a receivable from your customer and not cash so for those three months your profit exists only on paper.

Meanwhile, you’re still paying salaries, rent, subcontractors, and taxes—all in real-time, with real dollars.

If your team grew to support that project or you ramped up marketing and bought materials, you may actually be spending more than you’re taking in. Despite your “profitable” June, your bank account could be shrinking fast.

Profitable but cash-poor: real-world scenarios

Here are some classic examples of what this might look like in your business if you are showing good profitability, but cash is still very tight:

1. The slow-paying customer trap

You may have a $500,000 renovation or design contract, but the client’s payment terms are 90 days. Even if you have been very savvy and negotiated pay when paid terms with your subcontractors, you will still be paying staff every two weeks and paying material suppliers at month end. Not to mention your regular suppliers and general overhead costs.

By the time the client pays their invoice you may have already spent $300,000 - $400,000 keeping the project moving, and you have likely been using your credit line to fund it. And if there is a holdback/retention on the job, then this only makes this scenario worse.

2. Growing to fast

Landing that new marquee project/client is exciting, but the ramp up burns through cash. You are hiring new staff, maybe investing in new equipment or tools, you are buying large quantities of materials for the project, all of which require cash today. By the time the collections start to come in you will be several months into the project/engagement, and once again, you will have been funding all of this from either your working capital or your credit line. You’re showing bigger sales and even growing profit margins, but there is a lag before the working capital will catch up.

3. Inventory and materials creep

In construction or technical services, there is sometimes the tendency to buy a little more material than you need, to ensure you don’t run out on the job. The thinking being that you will use it on the next one. Or maybe your purchaser can get a nice discount if they buy are larger quantity of commonly used material. Those costs show up as assets as they are sitting in your inventory, not expenses. So, your profit looks untouched, but your cash is tied up in stuff sitting in a warehouse or trailer.

4. Overreliance on credit

Many firms bridge cash gaps with lines of credit (LOC), that is what they are for. However, if you aren’t diligent in monitoring the use of your LOC, the mounting interest costs will quietly eat into our profits. Eventually, you realize you’re funding day-to-day operations with borrowed money, and repaying a heavily drawn LOC takes a significant bite out of your available cash.

The metric nearly as important as profit: cash conversion cycle

If profit doesn’t tell the full story, what else should you be watching?

One powerful concept every owner should understand is your cash conversion cycle (CCC).

The CCC measures how long it takes for your business to turn an investment in resources (like payroll and materials) into cash from clients.

It’s calculated by looking at three things:

1. Days sales outstanding (DSO): How long customers take to pay you.

2. Days payable outstanding (DPO): How long you take to pay your suppliers.

3. Work in progress (WIP) / inventory turnover: How long your projects or inventory tie up cash before you can invoice.

Here’s a simplified formula:

Cash conversion cycle = DSO + Days inventory – DPO

The shorter your cycle, the faster you turn sales into spendable dollars.

If your clients take 60 days to pay, but you pay vendors in 15 days, that’s a 45-day gap where you’re floating the business. Multiply that by several projects, and you’ve got a serious drain on liquidity.

By shortening your CCC—even by a few days—you can unlock tens or hundreds of thousands in working capital without needing a loan or investor.

What can you do about it?

If this all feels overwhelming, take a breath. The good news is there are practical steps you can take to improve cash flow—even if you’re stuck in long payment cycles or navigating growth.

Here’s where to start:

1. Map your cash flow

Don’t rely solely on your P&L. Use a rolling 13-week cash flow forecast to understand where money is coming from and going. This lets you anticipate crunches before they happen.

2. Revisit payment terms

Negotiate better terms with both clients and vendors. Can you shorten client payment windows, offer early pay incentives, or require deposits? Can you extend supplier payment terms without hurting relationships?

3. Invoice promptly and follow up

Sounds simple, but many businesses delay invoicing or let A/R age too long. Make billing and collections a priority. Build collection calls into your monthly routine, so they are check-ins with your customer, not calls demanding payment.

4. Track WIP and overruns closely

If you’re in project-based work, know how far along you are and what’s been invoiced vs. delivered. WIP write-offs and scope creep silently eat into both profit and cash, so stay diligent on change management.

5. Review compensation and draws

If you’re taking large owner draws based on profit, be sure they align with actual cash availability. Many businesses unintentionally strain cash flow by distributing too early or too often.

6. Look for leaks

Recurring subscriptions, idle equipment, or redundant staff roles can quietly drain thousands per month. Scrub your overhead line by line.

7. Ensure your project accounting is accurate

Running multiple projects, it can be easy to accept an “allowable” percentage of unbillable costs, or non-reimbursable costs. These accounts are often the biggest drain on your profitability if you are not monitoring then closely, and if you are not segregating these non-billable costs from your other job costs, you could be losing thousands of dollars of profit each year without knowing.

8. Watch your trailing 12-month DSO

If you are not tracking your DSO, you should be. Having a benchmark and watching how your business tracks to that benchmark month over month will allow you to spot when something changes. Once you are measuring it, you can then manage it.

A word to the wise: growth without cash is a risky game

A profitable but cash-starved business is a fragile one. You can’t invest in your team, take on new projects, or weather downturns if you’re constantly watching the bank balance.

In the U.S. and Canada, thousands of service-based companies close every year, not because they weren’t profitable, but because they ran out of cash.

Don’t let that be your story.

If you don’t’ need a full-time CFO, maybe all you need is a fresh set of eyes

If this post has you wondering where your own cash is hiding, you’re not alone. Most business owners I work with are fantastic at delivering value to their clients but run short on time or tools to connect the dots financially.

That’s where I come in.

As a Fractional CFO, I work with small and mid-sized construction and professional service firms. I help owners like you:

• Get clarity on where your money’s really going

• Forecast cash flow with confidence

• Improve billing and collection cycles

• Build strategies that support sustainable growth

No fluff. No jargon. Just real-world insights and a hands-on approach to getting your business running leaner and stronger.