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Cash flow and profit are essential financial metrics in business. Yet, it isn’t uncommon for those new to finance and accounting to occasionally confuse the two terms. Cash flow and profit aren’t the same things, and it’s critical to understand the difference between them to make key
decisions regarding a business’s performance and financial health.

Nội dung chính

    What is Cash Flow?Types of Cash FlowThe Cash Flow StatementWhat Is Profit?Types of ProfitThe Income StatementThe Difference Between Cash Flow and ProfitWhich Is More Important: Cash Flow or Profit?Data TablesCompany A – Statement of Cash Flows (Alternative Version)Company B – Annual Trial Balance (Alternative Version)Company B Income StatementWhat is the name of the financial statement that summarizes a firm’s revenue and expenses over a period of time?What do you call the financial statement that summarizes all revenues expenses and profit or losses of the business?What are the 3 financial statements?What is a balance sheet vs income statement?

For investors, understanding the difference between profit and cash flow makes it easier to know whether a profitable company is a good, long-term investment based on its ability to remain solvent in times of economic crisis. For entrepreneurs and business owners, understanding the relationship between the terms can inform important business decisions, including the best way to pursue growth.

Here’s everything you
need to know about cash flow, profit, and the difference between the two concepts.

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What is Cash Flow?

Cash flow refers to the net balance of cash moving into and out of a business a specific point in
time
.

Cash is constantly moving into and out of a business. For example, when a retailer purchases inventory, money flows out of the business toward its suppliers. When that same retailer sells something from its inventory, cash flows into the business from its customers. Paying workers or utility bills represents cash flowing out of the business toward its debtors. While collecting a monthly installment on a customer purchase financed 18 months ago shows cash flowing into the business. The list
goes on.

Cash flow can be positive or negative. Positive cash flow means a company has more money moving into it than out of it. Negative cash flow indicates a company has more money moving out of it than into it.

Types of Cash Flow

    Operating cash flow: This refers to the net cash generated from a company’s normal business operations. In actively growing and expanding companies, positive cash flow is required to
    maintain business growth.Investing cash flow: This refers to the net cash generated from a company’s investment-related activities, such as investments in securities, the purchase of physical assets like equipment or property, or the sale of assets. In healthy companies that are actively investing in their businesses, this number will often be in the negative.Financing cash flow: This refers specifically to how cash moves between a company and
    its investors, owners, or creditors. It’s the net cash generated to finance the company and may include debt, equity, and dividend payments.

Related: Financial Terminology: 20 Financial Terms to Know

The Cash Flow Statement

Cash flow is typically reported in the
cash flow statement, a financial document designed to provide a detailed analysis of what happened to a business’s cash during a specified period of time. The document shows different areas where a company used or received cash and reconciles the beginning and ending cash balances.

Go to the alternative version.

What Is Profit?

Profit is typically defined as the balance that remains when all of a business’s operating expenses are subtracted from its
revenues
. It’s what’s left when the books are balanced and expenses are subtracted from proceeds.

Profit can either be distributed to the owners and shareholders of the company, often in the form of dividend payments, or reinvested back into the company. Profits might, for example, be used to purchase new inventory for a business to sell, or used to finance research and development (R&D) of new products or services.

Like cash flow, profit can be depicted as a positive or
negative number. When this calculation results in a negative number, it’s typically referred to as a loss, because the company spent more money operating than it was able to recoup from those operations.

Types of Profit

    Gross profit: Gross profit is defined as revenue minus the cost of goods sold. It includes variable costs, which are dependent upon the level of output, such as cost of materials and labor directly associated with producing the
    product. It doesn’t include other fixed costs, which a company must pay regardless of output, such as rent and the salary of individuals not involved in producing a product.Operating profit: Like operating cash flow, operating profit refers only to the net profit that a company generates from its normal business operations. It typically excludes negative cash flows like tax payments or interest payments on debt. Similarly, it excludes positive cash flows from areas
    outside of the core business. It’s sometimes referred to as earnings before interest and tax (EBIT).Net profit: This is the net income after all expenses have been deducted from all revenues. Typically, this includes expenses like tax and interest payments.

The Income Statement

Information about a company’s profits is typically communicated in its
income statement, also known as a profit and loss statement (P&L). This statement summarizes the cumulative impact of revenue, gains, expenses, and losses over the course of a specified period of time.

Go to the alternative version.

The Difference Between Cash Flow and Profit

The key difference between cash flow and profit is while profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business.

Which Is More Important: Cash Flow or Profit?

Investors
and business owners are often in search of a single metric for understanding the health of a company. They want one line item in a financial statement to determine whether they should make an investment or pivot their business strategy. In these instances, cash flow and profit are often pitted against each other. But which is more important?

There isn’t a simple answer to that question; both profit and cash flow are important in their own ways. As an investor, business owner, employee, or
entrepreneur, you need to understand both metrics and how they interact with each other if you want to evaluate the financial health of a business.

For example, it’s possible for a company to be both profitable and have a negative cash flow hindering its ability to pay its expenses, expand, and grow. Similarly, it’s possible for a company with positive cash flow and increasing sales to fail to make a profit—as is the case with many startups and
scaling businesses.

Profit and cash flow are just two of the dozens of financial terms, metrics, and ratios that you should be fluent in to make informed business decisions. By gaining a thorough understanding of key financial principles, it’s possible to
advance professionally and become a smarter investor or business owner.

Are you interested in gaining a toolkit for making smart financial decisions and the confidence to clearly communicate those decisions to stakeholders? Explore our trực tuyến finance and accounting courses
and discover how you can unlock critical insights into your organization’s performance and potential.

This post was updated on April 19, 2022. It was originally published on April 21,
2022.

Data Tables

Company A – Statement of Cash Flows (Alternative Version)

Year Ended September 28, 2022 (In millions)

Cash and cash equivalents, beginning of the year: $10,746

OPERATING ACTIVITIES
ActivityAmountNet Income37,037
Adjustments to Reconcile Net Income to Cash Generated by Operating Activities:
Depreciation and Amortization6,757
Deferred Income Tax Expense1,141
Other2,253
Changes in Operating Assets and Liabilities:
Accounts Receivable, Net(2,172)
Inventories(973)
Vendor Non-Trade Receivables223
Other Current and Non-Current Assets1,080
Accounts Payable2,340
Deferred Revenue1,459
Other Current and Non-Current Liabilities4,521
Cash Generated by Operating Activities53,666
INVESTING ACTIVITIES
ActivityAmountPurchases of Marketable Securities(148,489)
Proceeds from Maturities of Marketable Securities20,317
Proceeds from Sales of Marketable Securities104,130
Payments Made in Connection with Business Acquisitions, Net of Cash Acquired(496)
Payments for Acquisition of Intangible Assets(911)
Other(160)
Cash Used in Investing Activities(33,774)
FINANCING ACTIVITIES
ActivityAmountDividends and Dividend Equivalent Rights Paid(10,564)
Repurchase of Common Stock(22,860)
Proceeds from Issuance of Long-Term Debt, Net16,896
Other149
Cash Used in Financing Activities(16,379)

Increase / Decrease in Cash and Cash Equivalents: 3,513

Cash and Cash Equivalents, End of Year: $14,259

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Company B – Annual Trial Balance (Alternative Version)

September 28, 2022 (In thousands)

AccountsDebitCreditCash and cash equivalents260,652

Accounts receivable467,976

Inventory676,089

Other current assets116,775

Property, plant & equipment985,563

Long-term intangible assets1,223,400

Other long-term assets31,093

Current portion of long-term debt
14,689
Accounts payable
312,170
Accrued expenses
242,427
Other current liabilities
27,777
Long-term debt, less current portion
236,282
Other long-term liabilities
281,588
Common stock
1,392,183
Retained earnings
771,200
Net Sales
4,358,100
Cost of Sales2,738,714

Selling and operating expenses560,430

General and administrative expenses293,729

Other income
960
Gain or loss on financial instruments, net
5,513
Gain or loss on foreign currency, net12,649

Interest expense18,177

Income tax expense257,642

Total7,642,889
7,642,889

Company B Income Statement

For Year Ended September 28, 2022 (In thousands)

ActivityAmountNet Sales4,358,100
Cost of Sales2,738,714
Gross Profit1,619,386
Selling and Operating Expenses560,430
General and Administrative Expenses293,729
Total Operating Expenses854,159
Operating Income765,227
Other Income960
Gain (Loss) on Financial Instruments5,513
(Loss) Gain on Foreign Currency(12,649)
Interest Expense(18,177)
Income Before Taxes740,874
Income Tax Expense257,642
Net Income483,232

Go back to the article.

What is the name of the financial statement that summarizes a firm’s revenue and expenses over a period of time?

What are the differences between a balance sheet and income statement?.

What do you call the financial statement that summarizes all revenues expenses and profit or losses of the business?

A profit and loss statement (P&L), or income statement or statement of operations, is a financial report that provides a summary of a company’s revenues, expenses, and profits/losses over a given period of time. The P&L statement shows a company’s ability to generate sales, manage expenses, and create profits.

What are the 3 financial statements?

The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company’s financial strength and provide a quick picture of a company’s financial health and underlying value.

What is a balance sheet vs income statement?

The balance sheet offers a snapshot in time, illustrating all that your company currently owns (assets and equity) and owes (liabilities). The income statement, on the other hand, records your revenue and expenses (and, consequently, net profit) within a specific period of time.
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