What is Profit?

Profit is the positive amount remaining after subtracting expenses incurred from the revenues generated over a designated period of time. This is one of the core measurements of the viability of a business, and so is closely watched by investors and lenders. Profitability can be quite hard to achieve for a startup business, since it is struggling to create a customer base and is not yet certain of the most efficient way in which to operate.

The Difference Between Profit and Cash Flows

Cash flow is the net amount of cash that an entity receives and disburses during a period of time. This concept differs from profit in several important respects, which are as follows:

Timing of recognition. Profit is based on the accrual accounting principle, meaning that revenue and expenses are recorded when incurred, not when cash is received or paid. This differs from the timing of cash flows, which are based on actual cash transactions, recording when money enters or leaves the business.
Measurement focus. Profit focuses on a company’s ability to generate earnings over time, while cash flow measures how much cash is available to run daily operations and pay bills.
Impact on business operations. Profit indicates long-term success but does not guarantee that a business can meet short-term obligations. Conversely, cash flow ensures that a company can pay suppliers, employees, and expenses on time.
Influence on financial statements. Profit is reported on the income statement, while cash flows are reported on the statement of cash flows.
Effect of non-cash expenses. Profit includes non-cash expenses like depreciation and amortization, which reduce net income. Conversely, cash flow ignores non-cash expenses, focusing only on actual cash movement.

In short, profit shows a company’s ability to generate earnings over time, while cash flows determine whether a business can pay its bills and stay operational.

Accounting for Profits

Profit is only accumulated in the accounting records for the current year. After that, the amount of profit reported is shifted into retained earnings, which appears in a company's balance sheet. These retained earnings may be kept within the business to support further growth, or may be distributed to owners in the form of dividends. Retained earnings may also be used to buy back shares.