Income vs Cash Flow: The Hidden Risk Behind “Profitable” Businesses
By: Noel C Ducusin
High income figures in financial statements can be misleading.
In business acquisitions and equity investments, income is often the first number people look at. Strong revenue growth and healthy net income can create the impression of a solid, profitable business. But income, by itself, does not tell you whether the business is actually generating cash.
Extra caution is required because deals rarely fail due to a lack of reported income. They fail because cash does not arrive when it is needed.
Income versus economic reality
Reported income reflects accounting recognition, not money received in the bank.
A company can appear profitable on its income statement while struggling to pay suppliers, meet payroll, service debt, or fund day-to-day operations. This disconnect between reported income and real liquidity is one of the most common blind spots for buyers and investors.
The critical question is not simply whether a business is profitable on paper, but whether its reported income reliably turns into cash.
Where accrual accounting creates risk
Most businesses prepare financial statements using accrual accounting. Under this system, revenue is recognized when it is considered earned, not when cash is actually collected.
This means income may be recorded when a contract is signed, even if the work will be performed over time. Revenue may also be recognized upon delivery of goods, even if payment terms allow collection months later. In more aggressive cases, income may be recognized based on milestones, estimates, or management assumptions that leave significant room for judgment.
Accrual accounting is legitimate and widely accepted. The risk arises when users of financial statements treat accrual income as if it were cash.
Consider a services company that signs a two-year contract worth 50 million. Under its revenue recognition policy, a large portion of the contract value is recognized early, causing a visible jump in revenue and profit for the year. On paper, the business appears to have grown significantly. In reality, payments are scheduled quarterly and subject to client approvals. The first meaningful cash collection may arrive months later, and any delay, dispute, or renegotiation affects cash flow but not the already-recorded income. To a buyer, this can look like financial momentum even though liquidity has barely changed.
A similar issue appears in businesses that show steady sales growth driven by customers who pay slowly. A trading company may report rising revenue year after year, while accounts receivable grow even faster. Receivable aging reports reveal large balances outstanding beyond 120 days. Income looks healthy, yet operating cash flow is weak or negative. The business is effectively financing its customers using its own balance sheet. Growth exists, but it consumes cash rather than generating it.
Income can also be distorted by items that have little to do with core operations. A company may report unusually high income in a particular year because it sold an asset, won a legal settlement, or reversed prior accounting provisions. These events boost net income and may even bring in cash, but they are not repeatable. If valuation is anchored to this inflated income level, buyers risk paying for earnings that will not recur.
Why this matters in acquisitions and valuations
When buyers and investors move from analysis to pricing, these distortions become critical.
Many transactions are priced using earnings-based multiples, on the assumption that reported earnings reflect real economic performance. When earnings are not supported by sustainable cash flow, those assumptions break down. Valuation conclusions become unreliable, and risk is quietly embedded in the purchase price.
Businesses that look profitable on paper may require constant cash infusions to operate. Apparent growth may conceal rising working capital demands. Debt may appear serviceable based on income, but strain liquidity once repayments begin. In these situations, the problem is not the accounting. It is the reliance on income without understanding cash.
What careful buyers and investors do differently
Experienced buyers and investors do not stop at the income statement. They trace income through to cash.
They look at operating cash flow trends over several periods to see whether profits are consistently converted into cash. They compare net income to cash generated from operations and question large or persistent gaps. They examine accounts receivable aging and historical collection behavior to understand how quickly customers actually pay. They review revenue recognition policies, especially any recent changes that may have accelerated income recognition. They assess customer concentration and credit quality to gauge collection risk. Most importantly, they ask whether reported income is recurring, repeatable, and tied to core operations.
These steps turn financial review from a surface-level exercise into a reality check.
Bringing it together
Income is an important signal, but it is not the destination.
Strong income without strong cash flow should trigger deeper inquiry, not confidence. The more aggressive the growth story, the more important it becomes to understand how and when cash is collected.
Headline income numbers are a starting point, not a conclusion. Sustainable business value comes from the quality, timing, and reliability of cash flows, not from accounting optics. Buyers and investors who focus on cash reality, rather than income alone, are far better positioned to avoid unpleasant surprises after the deal closes.
About the Author
Atty. Noel C. Ducusin is the Director for M&A at DoingBusinessPH, where he works with offshore investors—primarily from Japan, Europe, the US, and Southeast Asia—seeking to enter the Philippine market through acquisitions, joint ventures, and strategic partnerships. He also advises local companies, family offices, and high-net-worth individuals on originating and executing transactions, including preparing businesses to be investment-ready through reverse due diligence.
His work spans the full M&A cycle: identifying counterparties, managing due diligence, leading negotiations, structuring transactions, arranging financing, and coordinating with trusted vendors such as banks, suppliers, and contractors. For startups and new ventures, he helps design fundraising-ready structures and connects them with investors, making DoingBusinessPH a natural bridge between global capital and local opportunity.
Beyond transactions, Noel and his team provide executive education and professional development through speaking events, seminars, and small-group sessions like business lunches and roundtables, then carry that value forward into practical, business-ready solutions. These include annual subscriptions for legal and regulatory updates, customized in-house corporate training, and post-event compliance audits, along with exclusive deep-dive masterclasses and peer mastermind groups for executives. They also prepare executive toolkits with ready-to-use templates and offer premium one-on-one consulting sessions—all designed to turn the insights gained from these settings into clear, actionable steps that help investors and businesses navigate the Philippine market with confidence.
A lawyer by training with a degree in Business Management, Noel is also Senior Partner at N. Ducusin & Partners Law Offices, which specializes in Mergers & Acquisitions, Investments, Cross-Border Regulatory, and Corporate Advisory. Over the years, he has developed deep, practical expertise in corporate finance, company valuation, and financial modeling through hands-on involvement as part of the deal team in live transactions. This combination of legal and financial experience allows him to bridge both perspectives seamlessly, ensuring that deals are not only executed but positioned for long-term success.
He is always looking forward to comparing notes with investors, startups, and vendors to explore where his clients’ mandates align with theirs and to uncover potential opportunities and collaborations that benefit both sides. Please feel free to connect with him to continue the conversation and explore where your goals and his clients’ interests may intersect.
His mission for this blog is to help foreign investors, business owners, and managers by breaking down complex legal concepts and dense technical material into simple, straightforward, and actionable insights for better business decisions. Articles and briefs are written in plain everyday language, without jargon or unnecessary academic writing—the simpler and more practical, the better.
“Everything should be made as simple as possible, but no simpler.” – Albert Einstein