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What’s the Difference Between Cash Flow and Profit?

Scott Miller, Client Advisory Services Director
September 11, 2023
What’s the Difference Between Cash Flow and Profit?

In finance and accounting, two terms often get confused: cash flow and profit. While they may seem synonymous at first glance, these concepts carry distinct meanings and implications for businesses. We will define each and highlight their fundamental differences.

 

Cash Flow vs. Profit

Before diving into the differences, let's establish a clear understanding of what cash flows and profits are.

Cash flow refers to the movement of money into and out of a business over a specific period. This includes payments from customers, expenses, and investments. In simple terms, cash flow reflects the actual liquidity of a company. Cash activity is reported on the Statement of Cash Flows.

Profit, also known as net income or net profit, is the financial gain a business achieves after deducting all expenses from its revenue. It indicates the overall financial performance of a company and its ability to generate earnings. Profit is reported on the Profit & Loss Statement.

 

Timing Is Everything

One of the key differences between cash flow and profit lies in their timing. While profit is determined by recognizing revenue and expenses during a specific accounting period (usually monthly, quarterly, or annually), cash flow deals with actual cash transactions. This means that cash flow can fluctuate greatly, even if profit remains stable or shows a positive trend.

For example, consider a scenario where a business makes a significant sale in December, but the payment from the customer is received in January of the following year. The profit would be recognized in December, whereas the cash flow would only reflect the payment in January. This illustrates how profit and cash flow can exhibit contrasting patterns due to timing discrepancies.

 

Non-Cash Expenses vs. Actual Cash Transactions

Another crucial distinction lies in the treatment of non-cash expenses, such as depreciation and amortization, which affect profit but do not involve actual cash outflows. Depreciation is the systematic allocation of the cost of an asset over its useful life, while amortization applies to intangible assets like patents or trademarks.

Conversely, certain cash expenditures do not directly affect profit, such as fixed asset purchases or inventory purchases. Since these expenses impact cash flow but not profit, a company can generate positive profit while experiencing negative cash flow. This might occur if a business invests heavily in equipment or technology, with the correlated depreciation expenses being recognized over a 5–7-year period rather than all in the year the assets were purchased. In such cases, looking beyond profit and focusing on cash flow is vital to assess the company’s financial health.

 

Cash Flow

The phrase "cash is king" is popular for a reason. Cash flow provides a realistic view of a company's ability to meet its financial obligations in the short term. Is there enough money in the bank account to pay employees’ salaries? Can you afford a down payment on a new piece of equipment? Will you be able to pay your suppliers? It offers insights into the availability of liquid assets, which are essential for covering operational expenses, investing in growth, or weathering economic downturns.

A profitable business can face cash flow problems if revenue is tied up in accounts receivable or excessive inventory. Conversely, a company might experience positive cash flow even during periods of low or negative profit if it efficiently manages its operations, inventory, and collections.

As professionals, comprehending the distinctions between cash flow and profit is vital for gaining a holistic view of a company's financial well-being. While profit indicates long-term success, cash flow provides a more immediate and tangible measure of liquidity. By considering both metrics, you can make informed decisions that balance profitability with the reality of cash flow. If you’d like to learn more or have any questions, please contact us.

  • Individualization, Strategic, Self-Assurance, Positivity, Analytical

Scott Miller

Client Advisory Services Director

Scott Miller, Client Advisory Services Director, began his career in 2002. He has spent over two decades at Lutz and currently leads the Client Advisory Services division, shaping the department's strategic direction and growth. 

Leveraging his extensive experience, Scott focuses on providing business coaching and support across various industries, including construction, healthcare, manufacturing, and restaurants. He specializes in accounting procedures assessments, compensation consulting, and general business advisory services. Scott values helping clients and employees achieve success through thoughtful, tailored guidance and strategic planning. 

 

At Lutz, Scott’s strategic mindset and analytical approach allow him to address each client’s unique challenges, delivering practical solutions that support their growth. His ability to recognize individual strengths and foster a positive environment has been key in building one of the firm’s largest service divisions. 

 

Scott lives in Omaha, NE, with his wife Angela and their five children: Brayden, Allison, Emily, Braxton, and Bryant. Outside the office, he can be found cheering on Creighton volleyball and basketball, following UNK Loper athletics, coaching his kids' sports teams, and running. 

402.827.2036

smiller@lutz.us

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