Unit economics and finance
Profit versus cash
Accrual books record when value is earned. The bank records when money moves. Companies die from the second gap.
Companies do not die from negative net income. They die when the bank balance hits zero and nobody wires more money. The P&L can say you "made" $200k while cash fell $200k — or the opposite. Accrual accounting records economic activity when it is earned or incurred. Cash accounting records when money moves.
Modern financial statements are accrual-based, then reconciled to cash. That reconciliation is the whole point of the cash flow statement.
Concept
Working capital is the cash tied up in the operating cycle: inventory, receivables, payables, deferred revenue. For pure SaaS with annual prepay, working capital is often a source of cash. For businesses that invoice in arrears or hold inventory, working capital consumes cash as you grow.
Walking through the gaps
| Event | P&L impact | Cash impact |
|---|---|---|
| Customer pays $120k for an annual sub in January | +$10k revenue/month | +$120k in January |
| You invoice net-60, deliver this month | Revenue now | Cash in ~60 days |
| Buy $60k of laptops | Depreciate over years | −$60k now |
| Raise $5M venture round | Usually $0 revenue | +$5M financing inflow |
| Employee RSUs vest (public co.) | SBC expense | $0 cash (usually) |
The January prepay is the SaaS classic. You look $110k "behind" on the P&L in month one and $110k "ahead" at the bank. Founders who spend that cash like it was profit discover the trap at renewal: the obligation was always there.
The laptop is the opposite. Cash left immediately. The P&L spreads the cost over years as depreciation. You can look profitable on paper while the checking account is empty.
A raise is neither profit nor a product win. Cash goes up. Revenue does not. Calling that "cash-flow positive" is how teams fool themselves. See operating vs financing cash.
A tiny month
Start cash $1,000,000. Net loss −$200,000. Depreciation (non-cash) $10,000. Deferred revenue up $80,000. AR up $30,000. Capex −$20,000. No financing.
Operating cash = −200,000 + 10,000 + 80,000 − 30,000 = −$140,000
Net change = −140,000 − 20,000 = −$160,000
Ending cash = 1,000,000 − 160,000 = $840,000Loss was $200k. Cash only fell $160k because deferred revenue and depreciation helped, partly offset by AR and capex. Net burn for runway is closer to this cash change (before financing) than to net income.
Common mistakes
- Reading net income as burn. Accrual profit can coexist with cash drain, and the reverse.
- Spending January prepays like profit. Deferred revenue is an obligation to deliver.
- Celebrating a raise as operating health. Financing is a discrete event, not a business model.
Check yourself
You invoice $500k this month on net-60 terms and recognize it as revenue. What happens to cash this month from that invoice?
Nothing yet. Cash arrives in about 60 days. AR rises today.
A company posts a $200k net loss and cash only falls $160k. Name two reasons that can happen.
Non-cash expenses (depreciation, stock-based comp) and working-capital sources such as rising deferred revenue.
Key takeaways
- Profit is accrual. Survival is cash.
- Working capital (AR, AP, deferred revenue) funds or starves growth.
- Pair every P&L conversation with the bank balance and the cash flow statement.
Further learning
Next, the snapshot that holds the stocks: the balance sheet.
Related
Cash flow and the three statements
Why profit ≠ cash, how the balance sheet and cash flow statement work, deferred revenue from annual prepay, and how the three statements link.
The P&L for startups
Reading and building an income statement — revenue recognition, COGS, S&M / R&D / G&A, EBITDA and net income — with a worked $5M ARR SaaS example.