Profit and cash flow are both critical financial metrics, but they measure different aspects of a business’s financial health. Here’s a breakdown of their differences:
Profit
• Definition: Profit is the financial gain a business makes after deducting all expenses, including costs of goods sold, operating expenses, loan interest, and taxes, from its revenue.
• Types of Profit:
Gross Profit: Gross Revenue (Gross Sales) minus the cost of goods sold (COGS).
Operating Profit: Gross profit minus operating expenses.
Net Profit: Total revenue minus all expenses, including operating expenses, interest, and taxes.
Purpose: Indicates whether a company is generating more revenue than its expenses and this is what you pay tax on.
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Cash Flow
• Definition: Cash flow refers to the net amount of cash being transferred in and out of a business over a specific period.
• Types of Cash Flow:
Operating Cash Flow: Cash generated or used in the company’s core business operations.
Investing Cash Flow: Cash used for or generated from investments in assets or other businesses.
Financing Cash Flow: Cash received from or paid out for borrowing, repaying debts, issuing stock, or paying dividends.
Purpose: Indicates a company’s liquidity A/K/A How much money is in the bank.
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Example Scenario
• A company sells $10,000 worth of products but offers customers 30-day credit terms. In the same period, it pays $7,000 in cash for supplies and other expenses.
Profit: $10,000 (revenue) – $7,000 (expenses) = $3,000
Cash Flow: -$7,000 (as the company hasn’t received the $10,000 yet).
Understanding both metrics together provides a fuller picture of financial health. Profit shows long-term viability, while cash flow ensures day-to-day operations can continue.
