| Definition |
The actual inflow and outflow of cash in a business over a period. |
The ability of a business to generate income or profit over expenses. |
| Focus |
Liquidity and availability of cash. |
Financial performance and earnings. |
| Measurement |
Measured by cash flow statement (operating, investing, financing activities). |
Measured by net income on the income statement. |
| Time Frame |
Short-term; reflects real-time cash position. |
Long-term; reflects overall business success. |
| Importance |
Essential for day-to-day operations and meeting obligations. |
Indicates overall business viability and profitability. |
| Impact of Non-Cash Items |
Ignores non-cash expenses like depreciation. |
Includes non-cash items affecting profit calculation. |
| Can a Business be Profitable but Cash Flow Negative? |
No; cash flow must be positive to cover expenses. |
Yes; profit can be shown while cash flow is negative due to timing. |
| Can a Business have Positive Cash Flow but be Unprofitable? |
Yes; due to borrowing, asset sales, or delayed expenses. |
No; profitability measures actual earnings. |
| Usefulness for Investors |
Shows liquidity and ability to sustain operations. |
Shows earning potential and growth prospects. |
| Decision Making |
Helps manage working capital and operational needs. |
Helps assess business strategy and long-term planning. |
| Examples |
Receiving customer payments, paying suppliers. |
Revenue minus costs equals profit. |
| Financial Statements |
Shown in Cash Flow Statement. |
Shown in Income Statement (Profit & Loss). |
cash flow vs profitability