Cash Flow Isn’t Profit: Why Founders Confuse the Two (and How to Fix It)

Hi, I’m Alex, founder of ERPixel. For the past 10+ years, my team and I have helped companies across Europe, the Middle East, and Africa implement advanced financial management systems on top of Odoo ERP. We often work with businesses that already have accounting but completely lack internal financial control. And one mistake comes up again and again:

Founders think they’re profitable because there’s money in the bank.

This is a dangerous illusion. Cash flow is not profit. And confusing the two can lead to cash shortfalls, missed opportunities, regulatory issues, and bad business decisions. Let’s break it down in practical terms, without textbook fluff.

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Core Definitions: Cash Flow vs. Profit

We use the following terminology in our projects:

• Cash Flow is the movement of money on the company’s bank accounts. We only use the Direct Method, which is simple and clear:
  Net Cash Flow = Cash at Beginning of Period - Cash at End of PeriodIt includes:
  • customer prepayments
  • payments to suppliers
  • taxes
  • salaries
  Always gross, meaning with VAT or Sales Tax included.
• Revenue (or Net Sales) is income recognized for goods delivered or services rendered. Prepayments don’t count as revenue until the job is done. Revenue is always shown net of VAT.
• Expenses (Operating Costs) are costs for goods or services that the company actually received (supplier bills, salaries, rent, etc.), also net of VAT.
• Net Operating Income (aka Operating Result) = Revenue − Expenses
• For cash management we use: Cash Flow Statement (Direct Method)
• For profitability analysis we use: Profit and Loss Statement (Accrual Basis)

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Real Example: Positive Cash Flow, Negative Profit

Imagine this scenario:

In July 2025, your company receives $500,000 in prepayments from clients. You haven’t delivered any services yet.

Meanwhile, you pay:

• suppliers: $18,000
• employee salaries & taxes: $65,000
• office rent & utilities: $34,000

Cash Flow Statement:

• Opening Cash Balance: $20,000
• Inflows:
  • From customers: +$500,000
• Outflows:
  • Supplier payments: −$18,000
  • Salaries and taxes: −$65,000
  • Rent and utilities: −$34,000
• Closing Cash Balance: $403,000

Your cash looks strong. But let’s look at your P&L.

Profit and Loss Statement:

• Revenue: $0 (nothing delivered yet)
• Expenses:
  • Suppliers: $18,000
  • Rent and utilities: $34,000
  • Salaries: not included in July P&L (because they refer to June work)

Note: In our accounting model, salaries are accrued in the month they were earned, not paid. So July salaries are booked in June.

• Net Operating Income: −$52,000

You have positive Cash Flow but are showing a loss in your profit report.

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Why It Matters

This gap between cash and profit is not just a reporting issue. It creates real business risks:

• Customers can cancel or legally reclaim prepayments if services aren’t delivered
• Banks may deny loans due to poor P&L performance, despite healthy cash
• Investors won’t approve dividends from non-profitable entities
• Tax authorities may investigate when cash is strong but profits are weak

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Why Founders Get It Wrong

1. They treat bank balance as business health
2. They don’t get the logic behind accrual accounting
3. They lack internal reports (P&L, Cash Flow, Forecasts)
4. They rely only on tax accounting, which doesn’t reflect business reality

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What Good Financial Management Looks Like

Here’s the framework we set up for clients:

1. Daily Cash Flow Monitoring

Build your Cash Flow Statement using actual bank data.

Pro tip: Separate customer prepayments and supplier prepayments. They are liabilities and assets, not real income or expense.

2. Accrual-Based P&L

Revenue is recognized when service is rendered or goods delivered. Expenses are booked when the service is received or asset consumed.

Don’t delay invoicing. Don’t wait to recognize costs.

3. Granular Cost Structure

Break down expenses by:

• project
• client
• department

So you can answer questions like: “Why are office expenses up this month? Rent or employee perks?”

4. Multi-level Budgeting

Track both:

• Cash Flow Budgets (planned inflows and outflows)
• P&L Budgets (planned revenue and expenses)

This helps you detect overspending before the money leaves the account.

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What We Offer at ERPixel

We help companies implement this discipline using custom tools on Odoo ERP:

• Direct-method Cash Flow Statement
• P&L in multiple currencies
• Budgeting for both cash and profit
• Forecasting and variance analysis
• Payment approval workflows
• Consolidated reporting for multi-company structures

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Final Thought

Cash is survival. Profit is performance. You need both to grow.

If you’re managing your business from your bank app, you’re driving blind.

Let us help you bring clarity.

ERPixel: Expert-level financial structure on top of Odoo.