A non-cash expense reduces reported profit without any cash leaving the company in that period. The clearest example is depreciation. Because it lowers profit but not cash, it is one reason the two figures drift apart.
Depreciation and amortisation
Depreciation spreads the cost of a physical asset — a machine, a building, a vehicle — across the years it is used. Instead of recording the whole cost at once, the company charges a portion each year.
Amortisation does the same job for intangible assets, such as a patent or software, which have no physical form but still lose value over time.
- Provisions for doubtful debts set aside an estimate for customers who may not pay.
- Write-downs reduce the value of an asset that has fallen in worth.
- Employee stock options can be recorded as an expense without cash leaving.
Cash flow from operations starts from net profit and adds back non-cash expenses
Adding back removes charges that did not use cash during the period.
Suppose ABC Manufacturing reports a net profit of ₹200 crore and depreciation of ₹50 crore. The depreciation reduced profit, but no cash was paid for it this year, so operating cash flow starts by adding it back.
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.
Do not be fooled