Profit vs. Cash

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finance

Profit does not equal cash, however overtime \(profit = cash\).

Cash flow simply measures the flow of cash in and out of a system, it doesn't take into account left-over inventory or non-current assets. Profit on the other hand does take these into account. See [see page 44, example].

For example:

• Day 1 I buy 10 T shirts at £1.00 a shirt and sell 3 for £1.50

• Day 2 I buy 2 T shirts at £1.00 a shirt and sell 9 for £1.50

• At the end of day 1 my cash outflow is £10.00 and inflow is £4.50, total flow is -£5.50

• At the end of day 1 my loss is £10.00 and my profit is £4.50 from sales and £7.00 (7 * £1.00 Note: we use market price) from the remaining inventory so I'm left with £1.50 total profit.

Note: We treat remaining inventory as assets we don't have to purchase again.

• At the end of day 2 my cash outflow is £2.00 and inflow is £13.50, total flow is £11.50

• At the end of day 2 my loss is £2.00 in purchases, £7.00 in left over inventory spent and my profit is £13.50 from sales, total profit is £4.50

• At the end of both days my total cash flow is: £11.50 - £5.50 = £6.00

• At the end of both days my total profit is: £4.50 + £1.50 = £6.00

Note: Observe how cash flow at one point in-time is independent of the flow at an earlier point in time.

Note: We often represent gross profit as a fraction of sales, I.E. we divide total profit by the total income we get from sales.