The Deal About Profits: Difference Between Profit and Cash

Profits and cash are often found to be used interchangeably, although they denote different components within a business.

Profit denotes the financial gain, or amount of money a business has left over, after all expenses incurred in operations have been paid. If a business earns amount x in revenue for a project and also spends all of it towards expenses incurred in executing that project, there is zero financial gain.

In contrast, cash is a term used to denote money that is liquid, or available for immediate use. Any financial gain left over after paying up all expenses, and which can translate into money available for immediate use can be termed cash.

Profit is a term that lends itself easily to misunderstandings. Having made a profit may not necessarily indicate a ready reserve of cash. Profits may still remain locked in terms of unpaid invoices, payment dues not yet cleared by customers or money owed to the business but not yet paid. As a result, a successful sale or completion of a project may show up in the business books as profit, but if the customer has not paid for the past three months, the profit does not translate into cash or financial gain, even as expenses on the account continue, in case it is an ongoing project.

The Critical Points Of Difference

Probably the single biggest differentiator in this case would be: Cash is an ingredient essential to business formation. Profit comes in after this; cash is used to first set up the business operations, lease or buy premises, hire people, and pursue project executions to earn revenue. If the revenue earned covers the operational expenses and yet leaves the business with some cash, then a profit has been made.

Here are some points to illustrate the difference between these two terms better:

Profit:

• Monetary gains: Profit refers to the gains a business makes after taking into account investments made towards setting it up, including infrastructure, manpower, etc.
• Business growth: Profit is critical for business growth. The cash that profit translates into can be pumped back into the business to fuel further growth. If profit starts to decrease, the business will weaken and eventually stop generating any cash to sustain itself.
• External funding: Profit is an important factor when measuring business success. Whether or not a business can attract external funding or be a viable purchase, depends on the profits it makes.

Cash:

• Cash is the component that helps lend an identity to the business, in the first place. Any investment towards the business, whether of infrastructure or manpower, needs cash. The profit is derived later, out of the investment made by the business.
• Cash is critical for operations. Cash is needed to make new investments, in turn, allowing for the company to pursue more profit and growth.
• Cash is a marker of the financial stability and profit-making ability of a business. Running costs of the business depend on the amount of available cash.
• The cash flow statement of a business reveals available cash as well as payments or outflows that are yet to be made (accounts payable).

Confusion Between Profit And Cash

When talking in terms of business, the terms ‘profit’ and ‘cash’ are often used interchangeably. The implication probably being that profits translate into cash, eventually. But this should not be taken to mean that cash components are the more important of the two. If cash is a short-term necessity, profit is a long-term goal for business sustainability.

By definition, if there is no profit being made over a period of time, the cash will eventually dwindle. Without an inflow of cash, investments into the business dwindle as well, and the business may finally collapse. Conversely, pursuing profit alone may not be able to catapult a business onto a higher place on the growth curve. When a business pursues profit, cash is required in equal measures to sustain it in the form of more investment of say, premises, equipment and infrastructure, skilled staff, etc.

Ensuring A Balance

Consistent profits are the first step to business growth as cash reserves grow and there is more money to invest back into the business.

There are several ways to ensure a balance is achieved between profit and cash:

• Creating a strategic business plan: A strategic business plan is a document that guides the business, including expenses and investments.
• Creating a cash flow forecast: A cash flow forecast reveals the sources of money for the business, thus helping critical business decisions and investments.
• Creating a budget: The business’ income statement can be used to understand profit earned in the past. Projections can then be made for the future and money allocated for different expenses.

At Analytix, we help our clients from diverse industries explore different ways of streamlining operations so that profitability increases and cash flow is managed better. If you would like to learn more about creating stronger cash flow, please email us at sales@analytix.com or call us at 781.503.9002.

Written by

Analytix Editorial Team