| Definition |
The actual movement of cash in and out of a business during a period. |
The financial gain after subtracting all expenses from total revenue. |
| Measurement |
Measured in terms of cash inflows and outflows (operating, investing, financing). |
Measured as net income on the income statement. |
| Types |
Operating cash flow, investing cash flow, financing cash flow, free cash flow. |
Gross profit, operating profit (EBIT), net profit (net income). |
| Basis |
Focuses on cash transactions regardless of accounting accruals. |
Based on accrual accounting; includes revenues earned and expenses incurred. |
| Timing |
Reflects real-time cash status within the accounting period. |
Can include non-cash items like depreciation and amortization. |
| Importance |
Shows liquidity and ability to meet short-term obligations. |
Shows overall profitability and business performance. |
| Impact on Business |
Positive cash flow is crucial for operations, paying debts, and investments. |
Profitability is important for growth, shareholder returns, and valuation. |
| Can Business Have? |
Can have positive cash flow but negative profit (due to accounting expenses). |
Can show profit but have negative cash flow (due to delayed payments or investments). |
| Financial Statements |
Reported in the Cash Flow Statement. |
Reported in the Income Statement (Profit & Loss statement). |
| Non-Cash Items |
Excludes non-cash expenses like depreciation, amortization. |
Includes non-cash expenses and revenues. |
| Investor Focus |
Investors look at cash flow to assess liquidity and sustainability. |
Investors look at profit to assess earning power and business success. |
| Bank Perspective |
Banks focus on cash flow to evaluate loan repayment capacity. |
Banks consider profit for assessing creditworthiness but prefer cash flow details. |
| Example Scenario |
A company selling on credit may show profit but have low cash flow. |
A company might have a big one-time sale increasing profit but low cash flow if not yet collected. |
| Management Use |
Used for daily operations, budgeting, and cash management. |
Used for strategic planning, profitability analysis, and tax reporting. |
| Relation to Growth |
Consistent positive cash flow supports sustainable growth. |
High profit may not translate to growth without adequate cash flow. |
| Risk |
Poor cash flow can lead to insolvency even if profitable on paper. |
Profit without cash flow may cause liquidity crunch and operational problems. |
| Tax Impact |
Cash flow itself is not taxed, but cash transactions affect taxable income. |
Profit determines taxable income and tax liability. |
| Use in Valuation |
Cash flow projections are critical in discounted cash flow (DCF) valuation. |
Profit metrics influence price-to-earnings (P/E) ratios and other multiples. |
Cash Flow vs Profit