Profit is revenue minus costs for a period. Cash is the money a business actually has to spend. A question may give you a profit figure and ask whether the firm can pay its bills, or give you a cash shortage and ask whether the business is failing.
This lesson builds on the table from constructing a simple cash forecast in cash flow and finance. It leads into what a delayed receipt does and into financial statements and ratios.
Why are profit and cash different?
Profit follows the sale: a sale is counted when the goods are delivered, even if the customer pays later. Cash follows the payment: it moves only when money changes hands.
Three things commonly make the two differ.
- Credit sales. The sale appears in profit now and in cash later.
- Payments that are not costs for the period. Repaying a loan or buying a machine uses cash, but is not an expense of that month in the same way.
- Money that is not revenue. A bank loan raises cash without being a sale.
Depreciation goes the other way. It reduces profit, but no cash leaves the business.
How do you compare them for one period?
- Profit: write revenue for the period, then subtract the costs of the period.
- Cash in: include only money actually received in the period.
- Cash out: include only money actually paid in the period.
- Compare profit with net cash flow and name the reason for the difference.
- Say what it means: is the problem trading (costs above revenue) or timing (cash arriving later than it leaves)?
Worked example
Bengkel Perabot Jati in Kuching starts June with RM4,000 in the bank.
During June it delivers furniture to a hotel and invoices RM18,000. The hotel has 60 days to pay. The workshop pays RM7,000 for timber, RM5,000 for wages and RM1,000 for other costs in June.
Step 1, profit. Revenue RM18,000. Costs: 7,000 + 5,000 + 1,000 = RM13,000. Profit: 18,000 − 13,000 = RM5,000.
Step 2, cash in. The hotel has not paid, so cash in for June is RM0.
Step 3, cash out. RM13,000.
Step 4, closing cash. 4,000 + 0 − 13,000 = −RM9,000.
Step 5, interpret. The workshop made RM5,000 profit but ended June RM9,000 short of cash. The cause is timing: RM18,000 is owed by the hotel. Trading itself is sound, because revenue is larger than costs, but the workshop needs a way to cover the gap until the hotel pays in August, perhaps an overdraft or a request for a deposit.
When the hotel pays, RM18,000 arrives and the workshop is back to RM9,000 in the bank. The profit was real, and the cash simply came later.
The mistake to watch for
A common slip is to treat profit as if it were cash in the bank.
Mistaken answer: “The workshop made RM5,000 profit, so it has RM5,000 more cash than before.”
The student has assumed all revenue was received. The hotel has not paid, so cash fell by RM13,000.
The correction is to ask two separate questions every time: “What did the business earn?” and “What did it actually receive and pay?” Write the profit sum and the cash sum side by side, as the cash versus profit bridge does, and the difference becomes visible.
Check yourself
Try these on paper, then open each answer.
1. A bakery in Ipoh sells RM9,000 of goods on credit in a month. It pays RM6,500 in costs the same month. Find the profit and the net cash flow for that month.
Show answer
Profit: 9,000 − 6,500 = RM2,500. Net cash flow: no cash received, RM6,500 paid, so −RM6,500.
2. A firm receives a bank loan of RM15,000. What happens to its cash and to its profit?
Show answer
Cash rises by RM15,000. Profit does not change, because a loan is not revenue. The firm now has a debt to repay.
3. In two sentences, explain how a business with rising profit can still fail.
Show answer
Profit is counted when sales are made, but wages and suppliers must be paid in cash. If customers pay late, the firm can run out of cash and be unable to pay its bills even though its sales are profitable.
Where this leads next
Next, look at how finance sources compare by duration and control, because a cash gap needs the right kind of money to cover it. The practice set mixes all five skills. The ratios tool is handy when a question gives revenue and costs and asks for a margin.
Students sometimes know the rule “profit is not cash” but cannot show it with figures from an unfamiliar case. A teacher can build that habit with you in online one-to-one Business tuition.