Study Notes

Profit and Cash Flow - What is the Difference?

Level:
AS, A-Level
Board:
AQA, Edexcel, OCR, IB

Last updated 22 Mar 2021

When a business makes a profit it usually results in a similar cash inflow – but not always, and not straightaway! It is important to understand the basic reasons why net profit and net cash flow might not always be the same.

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:

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