Cash flow is the way cash flows through a business as deposits and withdrawals. The profit of a business is the difference between the gross income or sales of a business and its expenses. Bringing in profits does not always increase cash instantly and incurring an expense does not always reduce cash instantly. Make sure to understand well the differences between profit and cash flow, so that you can grow your business with sufficient cash flow.

1. How Profits and Cash
Flows Are Different?

2. Profits are defined as revenue fewer expenses.
They may also be referred to as net income.
Cash flows, on the other hand, refer to the
inflows and outflows of cash for a particular
business.
Bringing in profits does not always increase cash
instantly and incurring an expense does not
always reduce cash instantly.

3. Example
 Let’s assume that company “A” manufactures
and distributes lawn mowers to the stores and
other retail outlets. Following are the differences
between profit and cash flow:

4. 1. Revenue Generated
 Company “A” sells an INR 30,000 lawn mower to a
retail store on June 1st, and emails an invoice. The
business posts INR 30,000 in revenue, but the
retailer doesn’t pay the invoice until June 30th.
Revenue is posted immediately in the accounts but
cash is not collected for 30 days.

5. 2. Expense Incurred
 Company “A” sells an INR 30,000 lawn mower to a
retail store on June 1st, and emails an invoice. The
business posts INR 30,000 in revenue, but the
retailer doesn’t pay the invoice until June 30th.
Revenue is posted immediately in the accounts but
cash is not collected for 30 days.

6. 2. Profit Recognized
 The profit generated on the lawn mower sale is INR
(30,000-20,000=10,000), and that profit is posted
on June 1st. In accounting terms, revenue can be
recognized on June 1st, because the sales process is
completed when the product is delivered. However,
the profit of Rs.10, 000 is not collected in cash until
June 30th.

7.  From this example someone clearly understand
that profit & cash flow are totally different. A
business may gain more profit and if cash is not
there then its became very difficult to run the
business.

8.  Along with having high profits as a motive, it’s important to
have cash needs of your business with a careful planning.
Make sure to understand well the differences between
profit and cash flow, so that you can grow your business
with sufficient cash flow.
 In the long-term, one must get profitable eventually or find
stock investors to keep supplying you cash to make up for
your losses. In the short-term, even if you’re profitable, you
survive or fail based on whether you have the cash to pay
the bills. That’s why it’s said- Cash Flow is King.
Careful Planning of Cash flow