(profit and cash – 5 minute read)
Hey there accounting fans!
We’ve written about how cash is king in the past. But I often get lots of clients still confused between cash and profit. So let’s settle this once and for all. Here’s the definitive article on the difference between profit and cash.
Definition of profit and cash
Profit, is what is the value of all your income (sales) minus your expenses. In other words, it’s the amount of money the business has left over after paying for everything it needs to operate. Also, profit is what you typically pay income tax on. Not cash.
Cash is is simply the amount of money a business has on hand or in the bank. It’s the physical currency and coins that a business has available to pay bills, make purchases, or invest in new opportunities. If you opened up your bank account today and saw how much money you have left, that’s your cash.
The timing difference of profit and cash
Now that we’ve defined each term, let’s talk about the key difference between them: timing. Profit is a measure of a business’s performance over a certain period of time, usually a year or a quarter. It takes into account all of the revenues and expenses that occurred during that time period. From a tax point of view, this period of time is your 12-month financial year.
On the other hand, cash is a measure of a business’s financial position at a specific point in time. It reflects the amount of money the business has on hand or in the bank at that moment.
What does profit and cash mean for your business?
So, what does this mean for a business? Well, it’s important to remember that a business can be profitable and not have a lot of cash on hand. For example, a business may have made a lot of sales and had a high profit margin, but it may have also made a lot of large purchases or investments that drained its cash reserves.
On the other hand, a business may have a lot of cash on hand, but still be operating at a loss. This could happen if the business is holding onto cash to pay off debts or invest in new opportunities, but is not generating enough revenue to cover its expenses.
Tell the difference!
In short, profit and cash are both important metrics for a business to track, but they measure different things. Profit measures a business’s performance over a certain period of time, while cash reflects the business’s financial position at a specific point in time. As a business owner, it’s important to keep an eye on both to ensure the long-term success and stability of the business.
I hope that clears things up and as a business owner (or just a casual observer) you now know the difference between profit and cash.
Stay positive!