Cash Flow Confusion: Where Your Profit Really Goes

“I made a profit last month, so why does it feel like I still don’t have any money?”

As a business owner, you are probably ask yourself this question more often than you’d care to admit. Four times out of five, the short answer is: it feels like you don’t have any money because you probably don’t have any money!

The bigger question is: where did the money go?

This post breaks down why you can show a profit on paper, even when your bank account says something different. We’ll walk through the most common reasons for that gap. We’ll also talk about how to read what the numbers are really telling you.

Profit Isn’t Cash

The first thing to remember is: profit and cash are not the same thing.

If you're doing accrual-based accounting, your profit number doesn’t always match what’s in your bank account. Accrual means you recognize a sale when the goods ship out, not when you get paid. That’s the standard for most growing e-commerce businesses.

So if you made a sale in June, but your customer doesn't pay you until August, your books will still show that June was profitable. You’ll see the profit on paper. But the cash isn't there yet.

That’s one reason it feels like you made money but didn’t.

Another reason is where that profit shows up. Profit shows up on your profit and loss statement (P&L). But the cash doesn't just live there, it moves through your balance sheet, too.

Not sure how use these statements? Totally normal. You’re not an accountant. If you were, you wouldn’t need help.

Where Your Cash Actually Goes

Inventory

Inventory is the first place your cash disappears.

For example, let’s say your inventory is at $12,000 for the month. The best way to think of it is that you turned that cash into product. It’s no longer money in the bank. Instead, it’s boxes in a warehouse, it’s stuff waiting to get sold.

It’s like you literally put $12,000 on a shelf somewhere and you can't touch it until you sell it. And until you sell it, you can’t use that cash for anything else.

That’s one reason profit doesn’t feel like cash: because it isn’t. You already spent it. It just doesn’t look like spending when it shows up as inventory.

Accounts Receivable

The second place your cash goes is into accounts receivable.

This happens when you ship out a product, but don’t get paid right away. That’s how accrual accounting works. You recognize the sale when the order goes out the door, not when the money hits your bank.

If your customer has payment terms (e.g., they pay in 15days, 30 days, 45 days), then you're waiting on the actual cash to come in. So you make a sale in June. You book the revenue in June. But the cash doesn’t come in until August.

That money is stuck in limbo. On paper, it looks like you made money. But you’re still waiting to get paid. This is why your P&L can say one thing, and your bank account says something very different.

You’re not crazy. The numbers just aren’t on the same timeline.

Inaccurate Books

The third place your cash goes? Bad books.

Sometimes, your books say you made money, but you didn’t. Your books are just wrong.

This happens more often than people think.

Maybe you missed recording an expense. Maybe something got coded wrong. Maybe your balances are old and haven’t been updated.

It adds up fast.

A lot of business owners feel the problem before they see it in the numbers. You just know something’s off. You’re checking your bank account and thinking, this can’t be right.

You're probably right. But you won’t see the answer until your books are cleaned up.

Balance Sheet Activity

The last place to look is your balance sheet.

There are lots of other places that your cash could go other than just showing up on a P&L as an expense. You might have paid off a credit card. You might have paid back a loan. You might have caught up on a bill that was due months ago. You could have paid rent for the next three months.

That’s cash out the door. But it won’t show up on your P&L yet. These are all things that live on the balance sheet.

Here’s the problem: Most people don't ever look at their balance sheet because most people don't know how to read a balance sheet. But if you’re not reviewing your balance sheet regularly, you’re missing key pieces of the cash flow puzzle.

This is where a lot of the “missing” money goes. It’s not missing. You just weren’t looking in the right place.

Trust Your Gut (Most of the Time)

We always tell clients: You can trust your gut about 80% of the time.

Most of the time, you know how your business is doing. You can feel it. You don’t need to check a report to know if things are tight or if you’re on a good run.

It’s the other 20% that will catch you.

When you’re small, you can track everything in your head. You know what’s going in and what’s going out. But especially as the business grows, once you hit a certain point, you can't keep everything in your head anymore.

There are too many moving parts. Too many orders. Too many tools. Too many accounts.

That’s when clean books and a regular look at your numbers really matter. Gut instinct is a great signal. But it can’t run the whole business.

Conclusion

So yeah, you showed a profit, but you don’t have cash. That’s not a mistake.

The difference is sitting in your inventory. Or waiting to come in from a customer. Or already gone to pay off a loan. Some of it might not even be real—your books might just be off.

That’s why we look at not just the P&L, but the balance sheet, too. If you're only looking at one report, you’re missing part of the story. Start checking your balance sheet every month.

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If you're feeling confused and you’re tired of wondering where the money went, just shoot us a note at info@goeucalyptus.co or schedule a 15-minute intro call. We’d be happy to help you get clarity around your numbers.

The Basics: Cash vs. Accrual (Plain English)

Cash basis accounting means nothing touches your books until it touches your cash account. You don’t record a sale until the money shows up in your bank.

Accrual basis accounting means you record the transaction when it actually happens — not when the cash moves. If you ship a product today but don’t get paid for 30 days, you still record the sale today. You record it as accounts receivable, then swap that out for cash when it hits the bank.

What Works Best for E-Commerce

For most e-commerce businesses, the right answer is accrual— or at least a modified accrual system.

If you’re selling DTC and don’t have receivables, that’s one thing. But you do have inventory. And inventory is likely your single largest asset, and your biggest expense is the cost of that inventory when it is sold.

You also probably have accounts payable — vendor terms, delayed payments, etc. If you’re not recording those, you’re missing critical parts of your financial picture.

So even if you don’t have receivables, you still need accrual for payables and inventory. Without it, your books aren’t giving you the full story.

Why Cash Basis Gets Dangerous at 7 Figures

Once your business scales, the cracks in cash basis accounting start to show.

Say you start selling wholesale. Larger orders, delayed payments. If you’re not recording sales when they happen, your revenue is disconnected from reality.

Same thing on the inventory side. More sales means more inventory. More vendor terms. You need to know how much cash is tied up in product and what you owe vendors. You can’t track that without accrual accounting.

Sticking with cash basis when you’re at or above seven figures means you’rerunning a complex business on a bookkeeping method built for lemonade stands.

When Cash Basis Might Be Okay

There are rare cases where cash basis works. Usually it’swhen:
- Your inventory is homogenous (like bulk vintage clothing)
- You don’t sell wholesale or give customer terms (your customers pay when or before they get the items)
- You pay for inventory up front (no payables)

And even then, you’re limited in how much insight you can get. Cash basis meansyou only see what’s happening when the money moves — but a lot happens beforeor after that.

So yes, the IRS allows some businesses to expense inventory as they buy it —but for most e-commerce brands, accrual is the better long-term choice.

Still using cash basis accounting? Or unsure if your books actually reflect reality? Lonely, and just want to talk to someone? Book a call and let's chat!

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What Is EBITDA (In Plain English)

EBITDA stands for Earnings Before Interest, Taxes,Depreciation, and Amortization.

It’s a way to measure the cash flow generated by the operations of the business, without the noise of non-operational accounting entries.

By backing out interest, taxes, depreciation, and amortization, you’re removing costs that aren’t directly tied to day-to-day operations and would look totally different under different ownership.

It gives you a number that reflects how much profit the business actually produces from operations — a useful way to compare performance across companies, time periods, or potential buyers.

Why EBITDA Matters If You're Selling (Or Scaling)

When you're valuing a business, one common method is toapply a multiple to EBITDA. A software company might be worth 20× EBITDA. A manufacturing business might go for 10× (bote these are just for illustration, please reach out if you want an actual range for your company).

The idea is to look at comparable businesses, what they sold for, and how that sale price relates to their EBITDA. Then you apply a similar logic to your business to get an estimate of what it might be worth on the open market.

Yes, there are other valuation methods — based on revenue, assets, and sometimes just hope and dreams. But EBITDA gives you a cash-based, semi-objective number you can work from.

Normalization vs. Manipulation

Let’s talk about a dirty little secret: most small business owners run some personal expenses through their business.

That conference in San Diego? You stayed three extra days. Did you reimburse the company? Probably not.

This is where “normalizing” EBITDA comes in. You add back expenses that technically hit EBITDA but aren’t really business-related or wouldn’t existunder new ownership — travel, meals, vehicle expenses, etc.

So is EBITDA manipulated? Sometimes, yeah — but it’s more often just adjusted to reflect the true economics of the business.

What founders *should* be worried about isn’t manipulation — it’s accuracy. Most small businesses don’t intentionally fudge their numbers — they just have sloppy books. Bad bookkeeping, unreconciled accounts, missing entries. That’s what really skews EBITDA.

How to Calculate EBITDA in a Shopify Business

Step one: clean your books. If your inventory, receivables,or payables are wrong, your EBITDA will be too.

For product-based e-commerce companies, COGS is your biggest expense and inventory is usually one of your biggest assets. If those aren’t tied out, the whole foundation crumbles.

Once your balance sheet is clean, identify any expenses that should be normalized — personal travel, car payments, anything that wouldn't show up under different ownership.

Then do the math:
- Start with Net Income from your P&L
- Add back Interest Expense
- Add back Income Taxes (not payroll taxes — only income-based taxes)
- Add back Depreciation
- Add back Amortization

That’s your EBITDA. It’s a measure of the business’s operational cash flow. And it’s only meaningful if your books are tight and your normalizations are honest.

Thinking about selling? Trying to get a real handle on cash flow? Afraid your books are a mess? Just want to chat and talk about sports? Book a call here