What is the difference between "profit" and "cash flow from operations"?

Banking & FinanceFinance ManagementGrowth & Empowerment

Both "cash flow" and "profit" are vitally important for businesses and there are distinctions and notable differences between the two. As a business owner, taking cash flow for profit can be a serious mistake. While a company can be highly profitable with a little cash flow, some companies may have high cash flows yet are less profitable.

Cash Flow

Cash flow in brief is the amount of money that comes into, through and out of the businesses over a set period. Credit from suppliers, money owed to debtors, and cash in bank are not included in cash flow. It is completely concerned with the flow of money into and out of the business over time.

Cash flow is a sign of how well the company is doing and in many cases, cash flow is the metric that shows the health of the business. The bank lenders and investors often use cash flow to check the performance of the business.

Profit

Profit or net income is the money that remains after-sales and subtracting the costs. There are two types of profits −

  • Gross profit − Gross profit is calculated after deducting all the costs that are directly associated with providing goods and services.

  • Net profit − Net profit is the profit made by the company after all the associated costs, including taxes and operating expenses (payroll, rent, etc.) are deducted.

It is beneficial for your company’s bottom line to raise profits. However, it’s important to remember that the new sources of profitability – such as the expansion and/or development of a new product – may increase the expenses to a considerable extent, pushing the costs of operation beyond the breakeven point. This may cause the company to be out of money if operations are mismanaged.

Cash Flow Vs Profit

There are stark differences between cash flow and profit.

  • While the cash flow shows the flow of money into and away from the business, profit is the money that stays after deduction of all costs associated with the business.

  • Profit shows the immediate success of the business, while cash flow shows the long-term financial and monetary outlook of the company. In such situations, the key difference between cash flow and profit is linked with time.

While considering the difference between cash flow and profit, it must be remembered that companies may have profits but still have considerable cash flow issues. For example, if a small manufacturing firm sells products to large firms for which it is paid after some time, the firm may be profitable but have poor cash flow in that given period.

raja
Published on 28-Oct-2021 11:57:45
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