The Difference Between Cash Flow and Profits
Profit and cash flow are related, but they are not the same — and confusing them is a common business risk which can lead to diversion of capital from the business operation. So, it is imperative as a business owner to understand this distinction.
Profit is what remains after expenses are deducted from revenue on the income statement. It reflects performance over a period of time and includes non-cash items such as depreciation, accruals, and provisions. A business can report a profit even if it has not yet collected the cash from customers.
Cash flow, on the other hand, reflects the actual movement of money in and out of the business. It shows whether the business can pay suppliers, staff, lenders, and taxes when they fall due. Cash flow is impacted by the timing of receipts and payments, working capital management, and debt obligations.
In short: profit measures success on paper; cash flow determines survival in practice. Strong businesses manage both, but they prioritize cash flow because it funds operations, supports growth, and absorbs risk.