How Profits & Cash Flow Are Different

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How Profits and Cash Flows Are Different?
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Profits are defined as revenue fewer expenses.
They may also be referred to as net income. Cash
flows, on the other hand, refer to the inflows
and outflows of cash for a particular
business. Bringing in profits does not always
increase cash instantly and incurring an expense
does not always reduce cash instantly.
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Example

• Lets assume that company A manufactures and
  distributes lawn mowers to the stores and other
  retail outlets. Following are the differences
  between profit and cash flow

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1. Revenue Generated

• Company A sells an INR 30,000 lawn mower to a
  retail store on June 1st, and emails an invoice.
  The business posts INR 30,000 in revenue, but the
  retailer doesnt pay the invoice until June 30th.
  Revenue is posted immediately in the accounts but
  cash is not collected for 30 days.

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2. Expense Incurred

• Company A sells an INR 30,000 lawn mower to a
  retail store on June 1st, and emails an invoice.
  The business posts INR 30,000 in revenue, but the
  retailer doesnt pay the invoice until June 30th.
  Revenue is posted immediately in the accounts but
  cash is not collected for 30 days.

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2. Profit Recognized

• The profit generated on the lawn mower sale is
  INR (30,000-20,00010,000), and that profit is
  posted on June 1st. In accounting terms, revenue
  can be recognized on June 1st, because the sales
  process is completed when the product is
  delivered. However, the profit of Rs.10, 000 is
  not collected in cash until June 30th.

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• From this example someone clearly understand that
  profit cash flow are totally different. A
  business may gain more profit and if cash is not
  there then its became very difficult to run the
  business.

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Careful Planning of Cash flow

• Along with having high profits as a motive, its
  important to have cash needs of your business
  with a careful planning. Make sure to understand
  well the differences between profit and cash
  flow, so that you can grow your business with
  sufficient cash flow.
• In the long-term, one must get profitable
  eventually or find stock investors to keep
  supplying you cash to make up for your losses. In
  the short-term, even if youre profitable, you
  survive or fail based on whether you have the
  cash to pay the bills. Thats why its said- Cash
  Flow is King.