Sales, profit and cash flow: differences and a retail example

Sales measure what you sold. Profit reflects revenue less the costs and expenses recognized for the period. Cash reflects money actually received and paid. Some sales are collected later; some stock is paid for before it is sold.

Suppose your shop records the following transactions over one week. All amounts are NGN. The profit view uses accrual accounting. For clarity, the example excludes tax, financing, owner movements, returns and depreciation, and assumes the operating expenses are both incurred and paid that week.

Only ₦700,000 of the sales was collected during the week. Customers still owe ₦300,000. The shop also paid ₦800,000 for stock, including goods not yet sold.

The shop reports ₦200,000 profit but has used its opening ₦250,000 cash balance. In this simplified example, unpaid customer sales account for ₦300,000 of the difference and inventory increased by ₦150,000: ₦200,000 profit minus those two amounts equals a ₦250,000 cash reduction.

Buying stock is not automatically the same as recognizing the cost of goods sold. The stock and timing matter. This example also does not establish that the shop can meet its next obligation; that requires looking forward at actual due dates.

A positive bank balance can already be needed for supplier bills, payroll or rent. Available spending money is not simply the balance on the banking app. List the obligations, their amounts and their due dates before treating a balance as spare cash.

Keep expected customer collections separate from confirmed receipts. Use the expected payment dates to plan, and check how a delay would affect upcoming supplier payments.

We recommend preparing the plan for a fixed period and updating it as payments arrive. Include:

• Opening cash and bank balances, checked against records.
• Expected receipts, with customer, amount, date and confidence.
• Confirmed obligations, with supplier or purpose and due date.
• Proposed spending that is still optional.
• The projected closing balance, clearly distinguished from the actual balance.

Now carry the example into the next week. The shop starts with zero cash, expects to collect the ₦300,000 customers owe and has ₦220,000 of payments due. With no other movements, the plan ends at ₦80,000.

But suppose ₦90,000 of those collections slips to the following week. Receipts fall to ₦210,000, leaving a ₦10,000 funding gap against the planned payments. The negative balance is a warning in the plan, not proof that the bank will allow an overdraft.

Where the plan shows a shortfall, confirm collection dates and review optional spending before payments fall due. Agree any proposed payment extension with the supplier rather than assuming it will be available.

Review unpaid customer balances, slow-moving stock and payments that fall due before the related receipts. Owner drawings and loan-principal repayments can also reduce cash without being operating expenses. These items are excluded from the worked example but may be relevant to the business's actual cash plan.

Profit does not show how much cash is available for the next payment. Use a cash plan alongside the profit report, with expected collection dates and known obligations. Update it when receipts or payment dates change. The downloadable weekly sheet provides fields for both planned and actual amounts.