My books say I'm profitable — so where's the cash?

Accounting profit isn't the same thing as the cash actually sitting in your bank account, and the reason is that accrual accounting recognizes revenue when it's earned, not when it's actually collected. Sell goods on credit and issue the invoice, and the revenue is recorded in your books immediately — even though the customer might not pay for 60 or 90 days. The same works in reverse for expenses like depreciation, which spreads the cost of an asset you already bought and paid for across its useful life, with no cash actually moving each period.

The cash flow statement is the tool that makes this difference visible — it takes your reported net profit and shows where the cash actually went, or came from, split across three activities: operating (your core business), investing (buying or selling assets), and financing (loans, loan repayments, dividend distributions).

The indirect method is the one most commonly used in practice. It starts from the net profit reported in the income statement and adjusts it: non-cash items like depreciation and provisions are added back, and changes in working capital are factored in — an increase in receivables is subtracted (since that's cash still owed to you), while an increase in payables is added back (since that's cash you haven't paid out yet).

The direct method, by contrast, lists actual cash receipts from customers and actual payments to suppliers and employees, line by line. It shows the real movement of cash more clearly, but it requires tracking every cash transaction individually, which makes it more work to prepare. Accounting standards permit either method, but most SMEs default to the indirect method because it can be built directly from balances they already have.

A practical example: a company growing its credit sales sees net profit rise year after year in its financial statements, but its receivables — money still sitting with customers — grow at the same pace or faster. The result is a business that's profitable on paper while under genuine cash pressure, and one that needs to watch its collections closely before expanding further or distributing profits.

Banks are also increasingly asking for a cash flow statement when assessing financing applications, because it shows a company's actual ability to meet its obligations from operating cash, not just accounting profit. At RASEEKH, we help clients prepare this statement on a recurring basis rather than only at year-end, so cash pressure can be spotted early and addressed before it becomes a real problem.