This post is to describe the differences between Cash Flow and Profit as well as giving examples of Cash Inflow and Revenue.
Now, before I get into any detail lets get the definitions of both of them:
- Cash Flow is the movement of cash in and out of a business.
- Profit is when Total Revenue is greater than Total Cost. (Total cost being Fixed Costs + Variable Costs)
What’s the difference between Cash Flow and Profit then?
Well, Cash Inflow can come from many different sources whereas Revenue only comes from one source: the customers:
Cash sales make to customers – Cash Inflow and Revenue
Credit Sales made to customers – Only Revenue as Credit sales are not immediate cash and therefore not Cash flow
Capital raised from share sales – This is only Cash Inflow as Revenue only comes from customers.
Charge rent on flat upstairs – Cash Inflow and Revenue as the rent is producing cash into the business and the source is from customers therefore Revenue.
Take out a £20,000 bank loan – Nothing to do with customers here so not Revenue but its cash into the business so Cash Inflow.
Carry out a sale and leaseback – Only Cash Inflow
What you need to know is that Cash Flow occurs when cash is IMMEDIATELY injected into the business. Examples such as Credit Sales are NOT Cash Flow as the money made from the credit sales won’t be immediately injected into the business.
Revenue only comes from customers and sales from customers so it is easy to define when to talk and use Revenue or Profit as the money made will be from Customers.
Cash Outflow vs Costs
Cash Outflow is the movement of cash out of a business
Now, lets give some examples of Costs and Cash Outflow:
Cash Payments to Suppliers – This is Both Cash Outflow and Costs as it is a Cost to the business and a movement of cash out of the business too.
Purchases from Suppliers on Credit – Not Cash Outflow as its a Credit Sale so only Cost
Paying out Wages – This is both Cash Outflow and Cost as Wages is a fixed cost and has to be paid immediately to employees.
Repayments of Bank loans – Only Cash Outflow
Tax Bill Received but not yet paid – This is a cost as because its not yet been paid, there is no cash outflow for the business.
Buying Property – This is only Cash Outflow as buying a property is not a cost but an upgrade to the business.
Paying the electricity bills – Both Cash Outflow and Costs as this type of bill is a fixed costs while this bill involves cash outflow for the business.
Ultimately, Cash Outflow measures today’s money in and out whereas Profit is a more long term calculation.