In this episode, Dr. Reginald Tomas Lee explains why cash and profit are not the same. Cash is the life blood of a business. It drives daily operational decisions. Profit, on the other hand, is a relative metric (not measurement), dependent on the cost formula chosen. Executives and managers need to understand the difference and when to use each one.
About Dr. Reginald Tomas Lee
Dr. Lee is Professor of Operations and Management at Xaiver University. He is the author of five books including Lies, Damned Lies, and Cost Accounting and his latest Strategic Cost Transformation.
Reginald started his career as an engineer at IBM, and then worked in supply chain management at Ernst & Young. His consulting customers include Disney, DuPont, Home Depot and Toyota.
- Business Dynamics & Research (Consulting)
- firstname.lastname@example.org (Email)
Rukmani Gupta says
Profit is like our bones, and cash is our blood. Profit we require to sustain and it can be averaged out, if we are profitable from many years & suddenly due to expansion of any market down factor, company is in loss, past year reserves can compensate us, but cash, like blood need to circulate regularly in our body, maintaining liquidity is must to run the business at any point of time, it can not be averaged out.
Reginald Tomas Lee says
That’s what one may be led to believe, but the reality and the math of it is, that is not true. Profit is, in no way, “like our bones.” Our bones are well defined and structured. Profits are nebulous and subjective. You cannot decide to use another technique to determine the size and structure of your bones or of the skeleton in general. It is what it is. You can, however, change your profit based on several factors such as when you choose to recognize revenues, the scope of data that goes into figuring out your costs, and the costing technique itself.
Bones and the skeletal system is very well defined. Profits, unfortunately, are not. Hence the comparison isn’t quite accurate or precise.