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Cash flow and profit are two key financial metrics, yet it's common for those new to finance to confuse the two. Cash flow refers to the net balance of cash moving in and out of a business at a specific point in time. The result can be positive or negative. Positive cash flow means a company has more money moving in than out. Negative cash flow indicates the opposite.
Profit is the balance that remains when all of a business's operating expenses are subtracted from its revenues. When this calculation results in a negative number, it's typically called a loss because the company spent more money operating than it recouped from those operations.
The key difference between cash flow and profit is that profit indicates the amount of money left over after expenses are paid, while cash flow signifies the net flow of cash in and out of a business during a specific period. Cash flow is reported on the cash flow statement, whereas profit is reported on the income statement, sometimes called a profit and loss or P&L statement.
It's possible for a company to be profitable and have a negative cash flow, hindering its ability to pay its expenses, expand, and grow. Similarly, a company with positive cash flow can fail to make a profit, as is the case with many startups and scaling businesses. Neither metric is more important. Both provide vital information about a company's financial health.
Do you want to learn more about key financial metrics? Use the links in the video description to visit our Business Insights blog and explore our online finance and accounting courses.