The Relationship between Cash Flow and Profit in Business
Part of the Accounting All-In-One For Dummies Cheat Sheet
Making profit generates cash flow — any business owner knows that. What may not be known, however, is that the actual increase in cash during a given period is invariably lower or higher than the profit number. Understanding how cash flow relates to profit is critical for business owners and accountants.
The following points illustrate how cash flow relates to profit:
The amounts of cash flows during the period rarely are equal to the revenue and expense numbers in the P&L (profit and loss) report for the period.
Actions that raise cash flow: Decreasing accounts receivable and inventory; increasing accounts payable and accrued expenses payable.
Depreciation expense isn't a cash outlay; neither is amortization expense. Unusual losses recorded in the period may not involve cash outlay but rather be write-downs of assets or write-ups of liabilities.