An article by Moataz Mukhaimer, Strategy & Finance Advisor

The income statement, often regarded as the pinnacle of financial reporting, may be deceiving you. Yes, it’s one of the Big Three: the Income Statement, Balance Sheet, and  Cash Flow Statement. And yes, it tells you how much "income" your company has made. However, most business owners overlook the fact that it doesn't provide a complete picture. 

Let me explain. 

Revenue is not always cash 

The income statement starts with revenue. That’s the number everyone gets excited about.  But revenue is not cash. Just because you’ve “earned” income doesn’t mean you’ve received it. In sectors like construction, SaaS, and wholesale, it's common to recognise revenue  months before you get paid. That’s where Accounts Receivable shows up, but not on the  income statement. It’s on the balance sheet. So, you could show strong revenue growth and  still be cash-starved. 

This is not a theoretical risk. Many businesses end up raising funding just to survive the gap  between delivering a project and actually getting paid. That’s called a working capital  crunch, and it can kill a growing business faster than lack of demand. 

The mismatch between revenue recognition and cash collection is one of the most  dangerous traps for fast-growing businesses. You're scaling, taking on more clients, maybe  even hiring, but the cash just isn’t there yet. And by the time you realise it, you’re deep in a  liquidity problem. 

Not all expenses are cash 

Take depreciation. It’s an expense that reduces your net profit, but it doesn’t touch your  cash that month. You’re simply spreading out the cost of an asset over its useful life, an  accounting trick that’s important for reporting but not for managing your liquidity. 

So if your net income looks low, don’t panic. Look deeper. You might be doing just fine on  cash, which is what really keeps the business alive. 

Timing differences skew reality 

The income statement operates on the accrual basis of accounting. That means it matches  revenues with related expenses, regardless of when the cash changes hands. That sounds  appealing in theory, but it creates a disconnect. You might incur expenses in one period and get 

the revenue in the next. Alternatively, it could be the other way around. Either way, it distorts the picture, especially if you  look at one period in isolation. 

For example, a large one-time expense can tank your profit this quarter even if your  business is performing well over the year. Without context, you might make a hasty cut or  pull back on investment unnecessarily. 

Should we consider moving away from using the income statement? 

The answer is no. The income statement is still a powerful tool — especially for comparisons. 

It allows you to benchmark your company against others in your industry using  standard metrics. If I tell you my revenue grew by 15%, that might sound great. But if  everyone else grew by 25%, now we’re having a different conversation. 

It also gives you visibility into how you’re spending. The split between COGS (direct costs)  and operating expenses is vital. If your gross margin is healthy but your net margin is weak,  you may be overspending on admin, marketing, or headcount — which are management  decisions, not production issues. 

The structure of the income statement helps you understand profitability at different levels:  gross profit, operating profit, and net profit. Each one tells you something different. Gross  margin helps you assess your pricing strategy and production efficiency. Operating margin  reveals how lean or bloated your operations are. Net margin wraps it all up, but again, keep  in mind what’s behind it. 

The real compass: The cash flow statement 

Are you a founder or CEO seeking to maintain control? Focus on cash. How much cash  is coming in, where is it coming from, and how much is going out? That's what the cash flow  statement tells you. And it's the most honest reflection of your company’s health. 

Ultimately, profit is merely a theoretical concept whereas cash represents actuality. 

Your cash flow statement answers critical questions: Are we generating enough cash from  operations to sustain ourselves? Are we relying too much on financing? Are we investing  wisely? These answers don’t show up in your income statement. 

Cash is also what investors care about, especially in tough markets. If you’re not regularly monitoring your burn rate, cash runway, and operational cash flow, then you are not managing your finances; instead, you are gambling with them. 

Final thought 

Every financial statement matters. But don’t fall in love with your income statement. It tells  one part of the story, and sometimes, it's the most flattering part. The best CEOs I have  worked with understand this very well. They employ all three statements and comprehend their interconnectedness. But they know that if you want to truly understand the strength of a business and make smart decisions, you start with cash flow. That’s where the real story  lives. 

So next time someone waves a profit figure at you, smile politely — and ask to see the cash.