What's the Difference Between Profit and Cash?

Profit is what a business earns after deducting costs from revenue. Cash is the money it has available to make payments. A business can make a profit and still run short of cash because sales and costs do not always happen at the same time as cash receipts and payments.

Profit and cash flow

Profit is calculated over a period:

$$Profit=Revenue-Costs$$

Revenue is income from sales. Cash flow tracks money actually entering and leaving the business. A cash inflow is money received, while a cash outflow is money paid. The cash balance is the amount of cash available at a particular point in time.

The key timing difference is a credit sale: the customer buys now but pays later. The sale contributes to revenue and profit when made, but it does not bring in cash until the customer pays. Similarly, a business may have to pay a supplier before receiving cash from its customers.

Worked example

Suppose a business sells goods on credit for £1,000\pounds 1{,}000£1,000. The goods cost £600\pounds 600£600, which the business pays immediately. Assuming no other relevant costs or cash movements, the sale makes £400\pounds 400£400 profit:

£1,000−£600=£400 \pounds 1{,}000 - \pounds 600 = \pounds 400 £1,000−£600=£400

But the business has received no cash from the customer yet and has paid out £600\pounds 600£600. Its cash has therefore fallen by £600\pounds 600£600. When the customer pays, cash rises, but that payment is not a second sale or another £1,000\pounds 1{,}000£1,000 of profit.

If the business began with £700\pounds 700£700 cash, its balance would drop to £100\pounds 100£100 before the customer pays. It might then struggle to pay other bills. This is a liquidity problem: liquidity means having enough cash to meet payments when they are due.

In an exam answer, avoid treating profit as the amount in the bank. State whether you mean profit, cash flow or the cash balance, then explain when the money is actually received or paid.