Profit and Cash Flow - What is the Difference?

Profit and cash flow are two different calculations – as shown above.

There are two main ways in which net cash flow differs from net profit during any accounting period:

(1) Timing differences

These arise because a business may not received cash straightaway from a customer and it may also delay payment for its costs.

For example, a customer may buy goods for £50,000 but be allowed to pay for those goods in 60 days.

(2) The way that fixed assets are accounted for

Fixed assets are the assets that a business means to keep. They are treated as capital expenditure in the financial statements – that means that the cost of those assets is not treated as an operating cost. So:

• Payment for fixed asset = cash outflow
• Cost of fixed asset = treated as an asset not a cost
• Depreciation is charged as cost when the value of fixed assets is reduced

Let’s look at a few more example transactions to help make the point about how cash flow can differ from profit: