Part 3 – Keeping Score: Cash vs. Profit – Accrual Accounting
One of the most commonly misunderstood concepts in business is, “Why is my profit position different than my cash position?” Profit and cash flow are both essential elements of a business, but they are not the same thing. To manage your business, you must understand the difference between making money and managing money.
How Profit and Cash Flow Are Different
Profit is revenue less expenses; it is also referred to as net income. Cash flow, on the other hand, refers to a business’s inflows and outflows of cash. Earning revenue does not always increase cash immediately, and incurring an expense does not always decrease cash immediately.
Below is a brief illustration to demonstrate just one of the many reasons why cash position and profit position are not the same.