How Are Net Profit And Cash Flow Different?

[camdin90]

Net profit and cash flow are not the same thing. But how are they different?

[Addis]

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 exchangedMany 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 health.A business can go bankrupt in the short-run if "negative" cash flows go on for too long a period of time; likewise they will likely go bankrupt in the long-run when net profits are too low over a long period of time.I hope that explains it well enough for you.If you need clarification,then post a Discussion comment under your question.----------------------------------------------------------------------------------References and resources:http://www.37signals.com/svn/archives2/small_biz_101_cash_flow.phphttp://beginnersinvest.about.com/cs/investinglessons/l/blnetprofitmarg.htmhttp://www.bplans.com/common/calculators/cashcalculator.cfmhttp://www.investopedia.com/terms/c/cashflow.asphttp://www.investopedia.com/articles/01/110701.asphttp://www.investorwords.com/768/cash_flow.htmlhttp://www.investorwords.com/3259/net_profit.htmlhttp://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_4144http://www.va-interactive.com/bankofamerica/resourcecenter/workshops/cashflow/cashflow.htmlhttp://www.planware.org/cashflowforecast.htmhttp://ideas.repec.org/p/ttu/wpaper/127.htmlhttp://en.wikipedia.org/wiki/Cash_flowshttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Profit_margin---------------------------------------------------------For more information or assistance,contact me LeheckaG on AskVille.

[Yanisin]

Cash flows show short-term financial health; Net profits are more indicative of long-term financial health; see details 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 exchangedMany 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 health.A business can go bankrupt in the short-run if "negative" cash flows go on for too long a period of time; likewise they will likely go bankrupt in the long-run when net profits are too low over a long period of time.I hope that explains it well enough for you.If you need clarification,then post a Discussion comment under your question.----------------------------------------------------------------------------------References and resources:http://www.37signals.com/svn/archives2/small_biz_101_cash_flow.phphttp://beginnersinvest.about.com/cs/investinglessons/l/blnetprofitmarg.htmhttp://www.bplans.com/common/calculators/cashcalculator.cfmhttp://www.investopedia.com/terms/c/cashflow.asphttp://www.investopedia.com/articles/01/110701.asphttp://www.investorwords.com/768/cash_flow.htmlhttp://www.investorwords.com/3259/net_profit.htmlhttp://www.toolkit.com/small_business_guide/sbg.aspx?nid=P06_4144http://www.va-interactive.com/bankofamerica/resourcecenter/workshops/cashflow/cashflow.htmlhttp://www.planware.org/cashflowforecast.htmhttp://ideas.repec.org/p/ttu/wpaper/127.htmlhttp://en.wikipedia.org/wiki/Cash_flowshttp://en.wikipedia.org/wiki/Cash_flow_statementhttp://en.wikipedia.org/wiki/Net_profithttp://en.wikipedia.org/wiki/Profit_margin---------------------------------------------------------For more information or assistance,contact me LeheckaG on AskVille. Sources: My professional experience and personal opinion LeheckaG 68 months ago Please sign in to give a compliment. Please verify your account to give a compliment. Please sign in to send a message. Please verify your account to send a message.