Profit is what a company earned in a period by the accounting rules. Cash flow is the money that actually moved. They're different numbers and both are true.
Profit is what a company earned in a period by the accounting rules. Cash flow is the money that actually moved. They're different numbers and both are true.
The gap comes from timing. Accounting counts a sale when it's made. Cash arrives when the customer pays. Accounting spreads the cost of a big purchase over the years it's used. Cash leaves the day the purchase is paid for. Spreading a cost over years is called depreciation for physical things and amortization for everything else.
Cash flow from operations is the cash the business itself produced. It's the first section of the cash flow statement.
Netflix in two years. In millions.
| Year | Net income ($M) | Cash from operations ($M) |
|---|---|---|
| 2019 | 1,867 | (2,887) |
| 2023 | 5,408 | 7,274 |
In 2019 Netflix reported $1.9 billion of profit and burned $2.9 billion of cash. Both numbers are from the same annual report.
Here's the gap. Netflix pays for shows up front. Cash leaves when the show is made. But the P&L spreads that cost over the years people watch it. So in a year of heavy production the P&L shows a fraction of the spending and the cash flow statement shows all of it.
By 2023 the library was built. The P&L was still amortizing old shows while the cash going out on new ones was smaller than what was coming in. Profit $5.4 billion. Cash $7.3 billion. The gap flipped.
The trap is trusting one number.
A company can be profitable and run out of cash. Netflix borrowed billions through those years to cover the gap. A company can also show cash and no profit. A business selling off equipment produces cash while the P&L shows a loss.
When profit and cash disagree the question is why. The answer is always timing. Find what was paid for before it was counted or counted before it was paid for.
You're the finance lead at a streaming startup. Your CEO says the company is profitable so it doesn't need to raise money.
Your P&L shows net income of $20. Your cash flow statement shows cash from operations of negative $45. Which number tells you whether you can make payroll?
Cash from operations. Payroll is paid in cash.
Name the most likely cause of the gap for a streaming company.
Content paid for up front and expensed over years. Same as Netflix in 2019.
Netflix's gap in 2019 was profit $1,867 million against cash negative $2,887 million. How wide was it?
$4,754 million. Nearly five billion dollars.
Reply to your CEO in one sentence.
We're profitable on paper and burning $45 in cash. We need money or we need to slow production.
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