Cash vs Profit
Cash and profit are two equally important components of any business. Cash is measured by the cash position and cash flow statement, whereas profits can be seen in the company’s profit and loss statements. Companies frequently face the dilemma as to whether they should focus on cash generation or profit maximization. A company may decide to offer sales promotions to generate fast cash by sales, but may end up sacrificing long term profit. The article offers a comprehensive explanation on the terms cash and profit and shows the similarities and differences between the two.
Profit
A profit is made when a firm is able to make sufficient income to surpass its expenses. The term ‘profit’ is used as opposed to surplus because the firm in reference is operating with the sole concern of making a profit. The profit made by a firm is calculated by reducing all the expenses (utility bills, rent, salaries, raw material costs, new equipment costs, taxes, etc.) from the total income that a firm produces. Profits are important for a firm because it is the return that business owners obtain for bearing the costs and risks of running the business. Profits are also important because it provides some idea of how successful the business is, and can help attract external funding. Profits can also be reinvested in the business, to grow the business further, and it will then be called retained profit.
Cash
The running of the business, financial stability, profit making capacity, and ability to pay for running costs and expenses depends on the amount of cash that the company holds. Cash may be in a number of forms such as through income that is received, funds held in bank accounts, funds that are to be received from debtors, cash that is held in hand etc. Companies will use cash for a variety of purposes; to produce goods and services, to purchase raw materials and machinery, to hire and maintain their workforce, etc.
Cash position and cash flow are important indicators of the amount of cash that is held by the firm. The cash position is the amount of cash that is currently held when compared to the pending expenses and other obligations. Cash flow is the statement that shows the changes that occur in the cash that is held by the business. A positive cash flow is beneficial to any business. Having a positive cash position and cash flow will help the company meet its payment needs and debt obligations and will also result in money being accumulated for future reinvestment and financial security.
What is the difference between Cash and Profit?
Cash and profit are two important components of any business. They are equally important and maintaining a good profitability and cash position are essential to the smooth running of any business. Profits are the funds that are left over for the business, once all expenses have been paid. The cash held by a business can be evaluated by the company’s cash position and cash flow statement that provide an overview of the businesses cash inflows and outflows over time. Cash can be in a number of forms; even the profit that is made in sales is received in cash, which might be deposited into a bank account that is used to pay for other expenses, meet payment obligations or to reinvest in the business.
Summary:
Cash vs. Profit
• Cash and profit are two important components of any business. They are equally important and maintaining a good profitability and cash position are essential to the smooth running of any business.
• A profit is made when a firm is able to make sufficient income to surpass its expenses.
• The cash can be in a number of forms; even the profit that is made in sales is received in cash.
• The cash held by a business can be evaluated by the company’s cash position and cash flow statement.
• The running of the business, financial stability, profit making capacity, and ability to pay for running costs and expenses depends on the amount of cash that the company holds.