Finance means money. And money for a business means cash.
Cash
Cash is called the lifeblood of a business because every business organization needs cash to cover start-up costs, keep functioning and expand.
It is simple. Cash is the money that a business actually receives from the sale of goods and provision of services. It can be either held as actual cash in hand hold in the business (in the safe, locker, drawer, etc.), or at the bank as virtual cash hold in the company’s bank account.
A business uses Cash Flow (Cash Flow Statement and Cash Flow Forecast) to effectively manage all its cash transactions.
Profit
Profit is not cash. So what is profit? Profit is the difference between the firm’s total Sales Revenue and Total Costs (TC) of producing products and running the business. Let’s take a look how profit is calculated:
Profit = Sales Revenue – Total Costs (TC)
Or, to be more specific:
Profit = Price x Quantity – (Fixed Costs (FC) + Variable Costs (VC))
When a sale is made to the customer, each sale contributes towards paying the firm’s Total Costs (TC). When enough products are sold to pay for all of the business costs, then, the firm breaks even. All sales beyond a firm’s break-even point generate profit for the business.
So, profit is made after all production costs, and the costs of running the business, are paid for. And, after the customer buys the product, and the payment is made, then the business receives its cash.
A business uses Profit and Loss Account (P&L Account) to effectively manage its sales revenue, all costs and profit.
Cash ≠ Profit
In conclusions, cash is not the same as profit.
