Most SMEs Don’t Know the Difference Between Cash Flow and Profit — Here’s What We See Every Day

As accountants working with small and medium-sized businesses across Malaysia, we regularly come across business owners who confuse profit with cash flow. Many only realise the difference when they start having trouble paying their bills — even though their accounts show a profit.

Here’s what the difference really means, and what we observe on the ground.

Cash Flow vs Profit: What Malaysian SMEs Often Get Wrong

Profit Is Not Cash

Profit is the amount left after deducting business expenses from sales. It shows up on your profit and loss statement.

Cash flow is the actual movement of money in and out of your bank account — what’s available to pay salaries, suppliers, rent, and other obligations.

You can be profitable but still run out of cash. This happens more often than people think.

What We See in Real Businesses

1. Profit on Paper, But No Money in the Bank

A business might show RM100,000 profit at the end of the year, but still struggle to pay monthly expenses.

Usually, the reasons are:

• Customers haven’t paid their invoices

• Inventory has been purchased but not sold yet

• The company bought a new vehicle or equipment using cash

• Monthly bank loan repayments, which don’t show up in the profit and loss statement

  
  

2. Sales Are Strong, But Cash Is Always Tight

We see this in businesses that are growing. Sales are up, but so are expenses. Often, the business owner is stretched thin because:

• Customers take 60–90 days to pay

• Suppliers want payment in 30 days

• Too much money is tied up in stock or deposits

• GST or tax payments haven’t been set aside

  
  

When this happens, business owners feel like they’re always playing catch-up.

3. “We Thought We Were Doing Fine Until the Cash Ran Out”

This happens when business owners only review their finances once a year, usually at tax time. By then, the problems have built up. Cash shortfalls go unnoticed until something bounces — salaries, EPF, rent.

Why This Keeps Happening

• Most SMEs don’t prepare or review a cash flow statement.

• They rely heavily on the profit and loss report and the sales figures.

• Some don’t separate personal and business spending clearly.

• Many don’t have monthly financial reviews — they only look at accounts during audit or tax season.

  
  

This leads to decisions being made without a full picture of the company’s financial health.

What Can Be Done

We tell our clients the same few things, again and again:

1. Keep a monthly cash flow record.

   
   

   Doesn’t need to be fancy — even a simple Excel sheet will do. Just track what money is coming in, and what’s going out.

   
   

2. Watch your payment terms.

   
   

   If your customers pay in 60 days, but you’re paying suppliers in 30, the gap will create cash problems.

   
   

3. Separate personal drawings properly.

   
   

   Don’t take money out of the business without recording it. This is one of the most common reasons business owners lose track.

   
   

4. Plan at least 2–3 months ahead.

   
   

   Be aware of large upcoming payments (e.g. tax, insurance, loan instalments).

   
   

5. Talk to your accountant regularly.

   
   

   Don’t wait until year-end. A monthly check-in helps you spot cash problems before they become serious.

   
   

Conclusion

We’ve seen businesses that make profit on paper go under because they couldn’t manage cash. At the same time, we’ve seen modest businesses survive tough periods simply because they kept a close eye on cash flow.

If you’re running a business, don’t assume profit means you’re safe. Look at your bank balance, your receivables, your payables, and your upcoming expenses. That’s where the truth is.

If you’re unsure how to start, speak to someone who handles this every day — not just at tax season.