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A sale can raise profit without bringing in cash.
A credit sale can lift reported profit before a dollar arrives. It records revenue and a receivable—the customer’s amount owed—not cash. That timing gap matters when inventory and expenses must be paid first.
Hypothetical one-month company; dollars
The bars set up one hypothetical month: the company starts with $80 cash, pays $60 cash for inventory, makes a $100 sale on credit, and pays $20 cash in other expenses. Assume there are no other transactions.
Chart values
| One-month inputs | Dollars |
|---|---|
| Opening cash | 80 |
| Credit sale | 100 |
| Inventory paid | 60 |
| Expenses paid | 20 |
Cash is gone before the customer pays.
Cash starts at eighty dollars. Paying sixty dollars for inventory leaves twenty; paying twenty dollars of expenses brings it to zero. The hundred-dollar credit sale doesn't change cash this month, because the customer hasn't paid.
Chart values
| Event this month | Cash balance, dollars |
|---|---|
| Start | 80 |
| Buy stock | 20 |
| Pay expenses | 0 |
| Credit sale | 0 |
The customer owes $100.
The inventory is sold through a credit sale, so it’s gone, but the customer hasn’t paid. Accounts receivable means money customers owe; at month-end, that receivable is $100.
Profit is $20, even with $0 cash.
Revenue of one hundred dollars, less sixty dollars for the inventory sold and twenty dollars in other expenses, leaves twenty dollars of monthly profit. That profit measures earnings, not the cash balance, which is zero.
Chart values
| Profit components | Dollars |
|---|---|
| Revenue | 100 |
| Inventory cost | -60 |
| Other expenses | -20 |
| Profit | 20 |
The company reports a twenty-dollar profit but has no cash at month-end. Where is the unpaid sale recorded?
Let's think this through. The company reports a twenty-dollar profit but has no cash at month-end. Where is the unpaid sale recorded? A: As cash from the customer. B: As accounts receivable. C: As remaining inventory. Choose an answer, or just think it through. I'll explain in a moment.
- As cash from the customer
- As accounts receivable
- As remaining inventory
The company reports a twenty-dollar profit but has no cash at month-end. Where is the unpaid sale recorded?
The answer is B: As accounts receivable. The sale counts as revenue, but the customer has not paid, so the hundred dollars is accounts receivable. The inventory was sold, and revenue is not the same thing as cash received.
- As cash from the customer
- As accounts receivable
- As remaining inventory
Working capital bridges spending and collection.
Profit records sales; cash waits for payment. Cash funds inventory, then a credit sale turns it into a receivable that returns as cash. Inventory and receivables tie up working capital; next month’s $100 collection restores cash, not profit.
A profitable business can still need cash.
Profit records sales; cash waits for customers to pay. Inventory and receivables tie up working capital. Bills due before receivables are collected still require enough cash or financing.