Profit and cash are measured differently. Profit uses accrual accounting: revenue is recorded when it is earned and expenses when they are incurred, whether or not cash has moved. Cash flow records money only when it actually changes hands.
Timing differences are the whole story
Receivables: a company sells goods on credit in March and records the revenue immediately. But the customer may pay in June. Profit rises in March; cash arrives later.
Inventory: a company pays cash for stock in January, but does not sell it until April. The cash has left, yet profit is only recorded when the sale happens.
Payables: a company receives goods in February and records the expense, but pays the supplier in April. The expense reduces profit now, while the cash leaves later — which actually helps cash in the short term.
Cash flow from operations = Net profit + non-cash expenses − increase in working capital
This bridges the profit figure to the cash the business actually generated.
Working capital is the bridge
Working capital is current assets minus current liabilities — mostly receivables, inventory and payables. When working capital grows, cash is being tied up; when it shrinks, cash is released. This is why a rise in working capital reduces operating cash flow.
Why profit and cash flow differ
Sell on credit and you can record revenue now while the cash arrives much later.
Accounting view
₹220 Cr
Revenue 800 − expenses 580
Profit is recorded as soon as the sale is made, whether or not cash has arrived.
Cash view
₹-180 Cr
Collected 320 − paid 500
Depreciation is subtracted from profit, but no cash actually left the business.
Difference between profit and cash
₹400 Cr
Stuck in receivables
₹480 Cr
Sales recorded but not yet collected
The three classic reasons for a profit–cash gap
- Receivables: sales recorded, cash not yet collected.
- Inventory: cash spent building stock that has not been sold yet.
- Depreciation: a non-cash expense that lowers profit without using cash.