Profit versus cash flow

Profit measures what the business earned; cash flow measures what it collected and paid. Accrual accounting deliberately separates the two, so they differ for three main reasons:

1. Non-cash expenses and income. Depreciation, amortisation, impairment and many provisions reduce profit without any cash leaving in the period — the cash went out when the asset was bought, or will go out later. Unrealised fair value gains raise profit without bringing cash in.
2. Working capital timing. Revenue is recognised on delivery, but customers may pay 30 or 60 days later — so growing receivables mean profit has been booked but not collected. Buying inventory uses cash before any expense is recognised. Growing payables and accruals mean expenses have been booked but not yet paid, which helps cash. Customer deposits (unearned revenue) bring cash in before it is profit.
3. Investing and financing flows. Buying equipment, borrowing, repaying loans, issuing shares and paying dividends move cash without touching profit at all.

The working capital rule. An increase in an operating asset (receivables, inventory, prepayments) absorbs cash, so it is subtracted from profit; a decrease releases cash and is added. An increase in an operating liability (payables, accruals, deferred income) is added; a decrease is subtracted.

Why growth eats cash. When sales rise, receivables and inventory rise with them. If customers take longer to pay than suppliers allow, every extra sale ties up cash for weeks before it comes back. A fast-growing, profitable business can therefore run out of cash and need an overdraft precisely because it is succeeding. Lenders look at operating cash flow alongside profit for this reason, and a persistent gap — profit rising while operating cash flow falls — is also a classic warning sign of aggressive revenue recognition.