Profit vs Cash Flow: Why Both Matter to a Business

Profit is a measure of performance over a period: what you earned against what it cost to earn it. Cash flow is a measure of movement: what actually entered and left the bank.

They differ because accounting recognises a sale when it is made, not when it is paid. Invoice a customer on 60-day terms and the profit is recorded now while the cash arrives later. Meanwhile salaries, rent and suppliers do not wait.

Several ordinary things widen the gap. Stock ties up money before it earns any. Equipment purchases leave the bank in full but affect profit gradually through depreciation. Loan repayments consume cash while only the interest portion touches profit. Tax paid in advance is cash out well before the year is judged.

This is why a growing business is often the most cash-strapped one: growth funds itself out of working capital before it repays anything.

Read both statements together. Profit tells you whether the business model works. Cash flow tells you whether it survives long enough to prove it.