Similar numbers answer different questions
One common system, called accrual accounting, records revenue when a business earns it and expenses when they are incurred—when those costs belong to that period—even if the related cash moves earlier or later. In this simplified model, profit equals revenue minus expenses.
Cash flow tracks actual cash coming in and going out during a period. Net cash flow is cash inflows minus cash outflows; it is not the same as the cash balance available today. A sale can count toward revenue before the customer pays, and a business can pay cash for something that benefits more than one period.
Use both views
Profit helps answer whether the period’s earned revenue exceeded its related expenses. Net cash flow shows whether more cash entered than left during the period. A cash balance shows what is available at one point in time; in a simple model, ending cash equals beginning cash plus net cash flow.
A healthy decision needs all three views. Profit without enough available cash can make bills difficult to pay, while a temporary cash increase does not automatically mean the business earned a profit.
Remember these ideas
Key ideas
- Revenue is the amount a business earns from sales or services during a period.
- In a simplified accrual-accounting model, profit equals revenue minus expenses.
- Cash flow records when cash actually enters or leaves the business.
- Cash available at a point in time depends on the beginning balance as well as net cash flow.
Make the reasoning visible
Compare profit with cash movement
- 1
A student T-shirt project sells 50 shirts at $20 each, so revenue is 50 × $20 = $1,000.
- 2
The project’s simplified expenses for the period total $650, so profit is $1,000 − $650 = $350.
- 3
Suppose only $400 of customer payments arrived during the period, while all $650 of related cash payments were made.
- 4
Net cash flow for the period is $400 − $650 = −$250, even though the simplified profit is positive. If the project began with $300 in cash, it ends with $50: $300 + (−$250).
Try the next step
Name the difference
A tutoring project earns $600 of revenue and has $450 of expenses. It collects $500 in cash and pays $400 in cash during the same period. What are its simplified profit and net cash flow?
Why is the $100 net cash flow not enough to decide whether a bill can be paid today, and what starting number is still needed?