Profit is an accounting measure of what a business earned in a period. Cash is the money actually in the bank. The two are related but not the same, and working capital is a big reason why.
When a company sells on credit, it records the sale as revenue immediately — even though the customer will pay weeks or months later. That sale boosts profit today, but no cash has arrived yet.
| Event | Effect on profit | Effect on cash |
|---|---|---|
| Cash sale of ₹1,00,000 | +₹1,00,000 | +₹1,00,000 |
| Credit sale of ₹1,00,000 (paid in 60 days) | +₹1,00,000 today | ₹0 today |
| Buying ₹50,000 of stock on credit | Recorded when sold | ₹0 now, paid later |
A sale can be recorded as profit well before the cash arrives.
If receivables keep growing faster than sales, more and more profit is sitting with customers rather than in the bank. The business may look profitable on paper and still run short of cash.
Cash from operations ≈ Profit − increase in working capital (+ other adjustments)
Consider Bharat Widgets Ltd, which reports ₹100 crore of profit but whose receivables grow by ₹40 crore. Broadly, about ₹60 crore of that profit has not yet turned into cash — it is owed by customers.
Working capital simulator
Working capital is the money tied up in the day-to-day running of a business.
Working capital
₹230 Cr
Interpretation
Cash tied up
Receivables + inventory − payables