Cash, Profit and Types of Profit (AQA A Level Business): Revision Note

Cash flow versus profit

• Profit and cash are different financial terminologies

• Profit is the difference between revenue generated and total business costs during a specific period of time

  • Profit can be an important indicator of a company's financial health and long-term success, as it helps to assess the effectiveness of a company's operations

• Cash is measured by taking into account the full range of money flowing in and out of a business

  • This includes revenue from sales, operating expenses, investments, loans, and any other cash-related transactions

• While a company may make a profit, they may lack cash, as some customers may not actually have paid them yet

Comparing cash flow and profit

• Cash performs a variety of functions in a business

  • It is used to cover regular operating expenses such as workers' pay, supplier invoices and overheads such as rent and utility bills

  • It can also be used to meet unexpected expenses, such as the replacement of broken equipment

• A profitable business is likely to fail quickly if it does not have sufficient cash

  • Cash-poor businesses will struggle to pay suppliers, employees and operating expenses

  • This is called insolvency 

    • Lifestyle retailer Joules announced plans to liquidate in December 2022 as a result of cash-flow difficulties, despite making a profit of £2.6 million during the previous year

Types of profit

• Profit is the money left over after costs have been accounted for

• There are several different types of profit

Types of profit