Module 6 of 11 14 min
Cash Flow
Why profitable companies can still run out of cash.
Course lessons
Step 1
The lesson
Profit and cash are not the same thing. A business can record a sale — and a profit — long before the customer actually pays. Meanwhile, it still has to pay its suppliers and employees on time.
The cash flow statement tracks actual money moving in and out, in three groups:
- Operating: cash from running the business — customers paying, suppliers and employees being paid.
- Investing: buying or selling long-term assets like equipment or buildings.
- Financing: borrowing, repaying loans, or raising money from owners.
Key term
Free cash flow
Operating cash flow minus spending on long-term assets. It's the cash a business actually generates that it could use to grow, repay debt, or return to owners.
Fast growth can be a cash trap. More orders mean more inventory and wages up front, while customer payments arrive later. Many businesses fail not because they're unprofitable, but because they run out of cash.
Step 2
See it
A business gets an order, pays for materials and wages right away, then delivers and records the sale as revenue. The customer pays 90 days later. In between, profit exists on paper while cash has gone out.
Order arrives
Great news
Pay materials & wages
Cash goes out now
Deliver & invoice
Revenue and profit recorded
Customer pays
Cash comes in 90 days later
Step 3
Real-world example
Profitable and broke
Bright Signs, a hypothetical sign shop, lands a $50,000 order from a school district. Materials and labor cost $30,000, so the job earns a $20,000 profit.
- The shop pays the $30,000 in costs in September.
- It delivers in October and records the $20,000 profit.
- But the school district pays invoices 90 days later — in January.
- Bright Signs only had $12,000 in the bank. By November, it can't make payroll.
The fix wasn't more profit — it was cash planning: asking for a deposit up front, arranging a line of credit, or negotiating faster payment.
Step 4
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 5
Summary
Profit is recorded when sales happen; cash moves when money actually changes hands. The cash flow statement groups cash into operating, investing, and financing. Free cash flow shows real cash generated. Fast growth and slow-paying customers can sink even profitable businesses.
Step 6
What you should remember
- Profit ≠ cash.
- Cash flow: operating, investing, financing.
- Free cash flow = operating cash flow − spending on long-term assets.
- Many businesses fail from running out of cash, not from losses.
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