Is cash flow the same as profit? This is one of the main confusing topics among beginners. Cash flow and profits are two of the most essential and commonly used terms in financial measures for businesses, yet they may be a little bit confusing for those who are new to this field. 

Cash flow and profit aren't the same, and it is very important to differentiate between them, as they play an important role in key decisions. They are very important indicators used to analyse the business performance and financial health.QuickBooks for your business. In combination, the QuickBooks Tool Hub and QuickBooks ProAdvisors continue to be your business financial management made simple, time-saving, and without mistakes.

In this article, we are going to discuss the difference between cash flow vs profit, their types in detail, and try to draw a clear picture for you.

What is Cash Flow 

The net balance of cash moving in and out of an organization over a specific time period is known as cash flow. For example, if a company purchases any inventory or pays its employees, the cash flows out from the company to the supplier or its employees. When a company makes a sale, cash flows into the business from the customers.

Cash flow can either be positive or negative. Positive cash flow indicates the company has more money moving in rather than going out. Negative cash flows indicate that the company has more money moving out of the business than into it.

Various Types of Cash Flow

There are mainly three types of cash flows.

• Operating cash flow: It is like the “lifeblood” for an organization; it refers to the net cash generated from a company's daily operations. To calculate operating cash flow, first calculate net income, add depreciation and amortization back in, at lastly make an adjustment for non-cash assets and non-financial debts. Positive operating cash flow is required to maintain business growth.

• Investing cash flow: This cash flow is generated through company investment-related activities and changes in fixed assets. A healthy company invests actively in its business, so generally, these numbers are often negative.

•  Financing cash flow: This refers to the movement of cash between the business and its investors, owners, and creditors. The net cash generated to finance the business may include short-term or long-term debt.

What is a Cash Flow Statement

The cash flow statement is mainly used to report the cash flow. A cash flow statement is also known as a profit and loss statement. It is designed to illustrate the ability of a business to generate cash during a specific time period. The cash flow statement breaks down the sources of cash and how it is used.  

What is a Profit

Profit is the balance that remains when we subtract the company's operating costs from its revenue. Profit can be positive, negative, or break even. When a company's profit number comes in negative, it is said to be in a loss, and vice versa happened it is said to be in profit. When the company does not generate a profit or loss, it is said to be at break-even. 

A business has many options for what it can do with its profits. 

• The company can distribute the profits among its shareholders, owners, and employees.

• Profits can also be reinvested in the company for growth.

• Profit can be used for purchasing advanced equipment, new inventory, and funding R&D projects.

Types of Profits

There are three main types of profits

• Gross profit: When you subtract the costs of goods sold(COGS) from the revenue, you get gross profit. It reflects the profits the company creates from its main activities after the cost of production is subtracted. If any company can’t achieve positive gross profits, it means its operations are financially unsustainable. 

• Operating profit: Operating profit is also known as earnings before interest and tax(EBIT). It refers to the net profit that the company generates through its main activities. In operating profits, we exclude both negative cash outflow( such as tax payments, interest payments on debt) and positive cash inflow from outside the core business.

• Net profit: It is the true profit, as it shows the total profit after deducting all the expenses from revenue. 

What is an Income Statement

The income statement mainly provides information about the profits made by the company. Sometimes the income statement is also referred as the profit and loss statement (P&L). An income statement is a financial statement that provides information about a company's revenue, expenses, gains, and losses.

How are the Cash Flow Statement and the Income Statement Different

Below are some of the major differences between the cash flow statement and the income statement.

Difference between cash flow and Profit

Until now, you have noticed some of the differences between profit and cash flow. Here is the quick overview. 

• Motive: Cash flow measures the net money that moves in and out of the business over a specific period of time. Profit measures the balance remaining after covering all your expenses.

• Statement: Cash flow is reported with the cash flow statement, while profits are reported with the Income Statement.

• Others: a business may be profitable with negative cash flow, and vice versa is also possible.

Profit or cash flow which is more important

There isn’t a complete and simple answer regarding this question, as both of these are different. Both of these are important in their own ways. Both of these are important metrics that are helpful if you want to evaluate the financial status of the business.

Profit and cash flow are two of the several parameters that will help you make any financial decision. Understanding and evaluating the key financial principles can help you be a smart investor and business owner.

Conclusion

There is not a single metric that can help you understand the financial health of any business. You should consider and evaluate various metrics before making any key investment decisions. We hope this article can help you outline the basic difference between profit and cash flow.