Cash and profit are two terms that are often confused in business studies as being the same thing, but it is important to distinguish between them if we are able to analyse businesses correctly. Simply put Cash is notes and coins either in hand or at the bank, while Profit is the difference between income and costs yet both can occur at different time scales. You can't spend profit, you can only spend cash. Both need to be examined to find which is the more important. .
Profit is considered to be long term; it shows whether or not a business is making money. How much profit a business appears to be making in its accounts could be an incentive to a number of people outside the business. Shareholders are a particularly important group in the way that they may receive a share of the profits in the form of dividends. How much profit a business is making usually decides how much of this money they get, along with the number of shares they hold. .
The idea is much the same for those wishing to invest in the business. If they feel the company is performing well due to it having high profits they may choose to invest their money in order to get something back on it. For businesses then, showing high profits on the profit and loss account could be beneficial in that attracting more investors would lead to an influx of cash that all businesses would appreciate. Although depending on how much or how badly a business needs cash still doesn't make a distinction between which is the most important. .
Of course if businesses appreciate extra cash no matter what their liquidity they will probably strife to keep their investors happy. Showing the uphold of good dividends to these people could come about through retained profits. Monitoring profits like this could mean that it is profit that is more important than cash. Retained profit is money that is kept in the business at the end of the financial year. It contributes to shareholders' funds on the balance sheet reserves.
