How are net profit and cash flow different?
When accounting and bookkeeping on a “strict” cash-basis, then cash flows and net profits become equal. But because most businesses have either: – “cash” transactions where the transaction and the transfer of cash occur at different times – non-cash transactions where actual “cash” is not exchanged Many businesses do their bookkeeping and accounting on an “accrual” basis. Some businesses are required to use accrual methods for tax or other reasons. It is because of this accrual method that cash flows and net profits become separately important. Net profits are Total revenue minus Total expenses, often calculated by taking Gross profits and subtracting overheads and interest expenses. Net profits are a measure of a business’s long-term financial health. A similar relative measure (to Net Profits) is EBITDA “Earnings Before Interest, Taxes, Depreciation, and Amortization”. Cash flows are cash receipts less cash payments. Cash flows are a measure of a business’s short-term financial healt
