UK0,M<$b@mevgɦmJ8s =-bU#b5')byiDz)%2.&_NKpGtJ|QGdr:>Fj0rA ؞F&!| 4`,mz3[
Study notes

Profit and Cash Flow - What is the Difference?

  • Levels: AS, A Level
  • Exam boards: AQA, Edexcel, OCR, IB
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:

Subscribe to email updates from tutor2u Business

Join 1000s of fellow Business teachers and students all getting the tutor2u Business team's latest resources and support delivered fresh in their inbox every morning.

You can also follow @tutor2uBusiness on Twitter, subscribe to our YouTube channel, or join our popular Facebook Groups.

Job board

Teacher of Mathematics

Prior Park Educational Trust, Gibraltar

Teaching Vacancies

Recruitment

Advertise your vacancies with tutor2u

Much cheaper & more effective than TES or the Guardian. Reach the audience you really want to apply for your teaching vacancy by posting directly to our website and related social media audiences.

Find our more ›

Advertise your teaching jobs with tutor2u