Question 1

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust.

**Revenue (turnover).** The total value of sales in a period. Sometimes called the **top line**. It says nothing about whether the business keeps any of it.

**Profit.** What remains after costs. There are several profit figures and they are not interchangeable:

**Gross profit** — revenue minus the **direct costs** of what you sold. Tells you whether the product itself makes money.

**Operating profit** — after overheads: salaries, rent, marketing, software. Tells you whether the **business** makes money.

**Net profit** — after interest, tax and everything else. The **bottom line**.

**Cash flow.** The actual **movement of money** in and out of the bank. This is where businesses die.

**Why profit and cash differ.** Accounting records revenue when it is **earned**, not when it is paid. So:

**You invoice a customer in January**, record the revenue, and are paid in April. Profitable in January, no money until April.

**You buy stock in advance.** Cash leaves now; the cost appears as profit reduction only when the item sells.

**You buy equipment.** The full cash payment happens immediately; the cost is spread across years as **depreciation**.

**You repay a loan.** The capital repayment is cash out but is not an expense at all.

**Why growth consumes cash.** This is the most dangerous case. Growing means buying more stock and hiring more people **before** the resulting sales are paid for. **The faster you grow, the bigger the gap** — which is why fast-growing, profitable businesses fail. The phrase for it is **overtrading**.

**What actually matters day to day:** how long customers take to pay, how long you hold stock, and how long you take to pay suppliers. Together these form the **cash conversion cycle**.

**The practical rule:** profit is an opinion shaped by accounting policy; **cash is a fact**. Forecast cash weekly, not monthly.

General information, not financial advice.

Question 2

What do the three financial statements actually tell you?

Accepted Answer

Each answers a different question, and reading any one alone gives a misleading picture — which is exactly why there are three. The profit and loss account (income statement). Did we make money over

Question 3

What is the difference between a business model and a revenue model?

Accepted Answer

A business model describes how the whole business creates and captures value; a revenue model is the narrower question of how you charge. The second is part of the first, and treating them as the

Question 4

What is the difference between cash and accrual accounting?

Accepted Answer

When a transaction is recorded. Cash accounting records it when money moves; accrual accounting records it when the economic event happens, regardless of payment. Cash basis. Income is recorded when

Question 5

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

Question 6

What is the difference between gross margin and net margin?

Accepted Answer

Gross margin tells you whether the product makes money. Net margin tells you whether the business does. They answer different questions and are frequently confused when people quote "margin". Gross

Question 7

What is working capital, and why does it matter so much?

Accepted Answer

Working capital is the money tied up in running the business day to day — current assets minus current liabilities. It matters because it is where cash goes to hide. What is in it: Stock (inventory)

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