What is the difference between profits and cash flow?

Why can a company outgrow its cash? What is the relationship between profit margins and growth capacity?

What is the difference between profits and cash flow?
Profits are what you earn in your company, and you specify them on your financial statements at the time it was realized... the cash flow specifies only the movement of cash... for example...





you start a company, and you sell $3,000 in product, you are very happy!, and you spent $1,000 developing it, so your income statement will look like: (assume no tax)





Sales $3000


Cost of Goods Sold $1000


Net Income (profit) $2000





You are happy indeed, you just made $2,000, but oh wait!! when they pay you, you receive a note, so you dont actually receive cash!!!, then your balance sheet will look like





Assets


Cash $0


Notes Receivable $3,000


Total Assets $3,000





Equity (your starting cap $1,000


Retained Earnings $2,000


Total Equity $3,000





As you can see, everything seems to go well, and yet you have no cash!!! you just spent all the cash you had. Your statement of cash flows would look like this in that example...





Cash Flow


Net Income $2,000


Starting Cash $1,000


A/R -$3,000


Ending Cash $0





You just had a net "burn" of cash of $1,000, you have no growth capacity, and as im sure you have guessed by now, the growth capacity has a huge relationship with the cash flow, not with the profit margin.
Reply:Cash flow is the amount of money in and out of a company over a period of time. Revenues and expenses are cash flows. Profit however is the remaining amount of revenue after all expenses have been paid.