The difference between cash and profits and the effect of transactions on profitability and liquidity
Profit and cash are not the same thing. A business can earn high profits but still run out of cash — and some transactions affect one without affecting the other.
Formula
Profit = Revenue − Expenses | Cash Flow = Cash In − Cash Out
Real World
In 2008, Woolworths reported profits on paper while simultaneously running out of cash to pay suppliers — within months it collapsed into administration despite years of recorded profitability.
Exam Focus
Always distinguish 'effect on profit' from 'effect on cash' separately; examiners penalise conflating the two.
Essay Framework
Use PEEL to structure every paragraph. Tap each step for guidance and an example.
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