Is Profit same as Cash
Updated: Sep 21, 2020
What is the difference between profit and cash?
It’s all money, right?
Technically, it is all money. But it is not the same kind of money.
Many people assume profit and cash are one and the same. But in business, they are very different metrics, each with a significantly different meaning.
Understanding the differences between the two – and how to manage them – is vital for the financial health of your business.
After all, you want to make sure that you are using those hard-earned dollars wisely!
If you need a bit of help getting your head around each element, this blog has you sorted.
What Is Profit?
Profit is simply Revenue minus Expense. In very simple terms it is how much money is left after all the outgoings related to the business is paid. Profit is recorded in the accounts in real-time, which may not be a true reflection of your cash flow. For example, as soon as you send an invoice to a client, the amount is recorded as sale in accounts receivable as a profit, even before it has been paid. the same thing goes with expenses. A bill you have received may be recorded in your book before you actually make a payment. Long story short: a profit written in the books does not necessarily equal cash in the bank in real-time
What is Cash?
Often referred as cash flow, cash describes that money that is flowing in and out of the business from any source, including investors or direct business activity. Your cash provided you with the ability to pay your expenses. A positive cash flow is necessary to ensure the liquidity of the business for the period. A negative cash flow will sink a business much more rapidly than you may anticipate. For a successful business, the amount of cash coming in must be greater than the expenses. Unlike profits, cash refer to the actual money you have a any one time in your bank account.