Newbie question: Cash flow vs Profit

Member since 2020 · 1 post · 0 votes

Hey all! I've been just lurking and learning, but now I need help to clarify some terms. I thought I understood the concepts, but when I read this blog by David Greene and another on Bigger Pockets versus what other websites tell me, I got confused. Are they saying the same thing, but I'm just getting caught up in semantics?

E.g:

David Greene: "Cash flow is defined as how much money is leftover after all expenses are paid on a rental property."

Isn't that profit?

Quickbooks: Profit is defined as revenue less expenses. It may also be referred to as net income. Cash flow, on the other hand, refers to the inflows and outflows of cash for a particular business.

BalancesMB: Cash flow is the money that flows in and out of the firm from operations, financing, and investing activities.

Thanks for your help!

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Nicole Heasley Beitenman

Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes

Look at it this way:

Say you have a property that rents for $500 a month. The mortgage payment, including taxes and insurance, is $350 a month. You pay the property manager 10%, or $50 a month.

That means you have $100 a month left over as profit.

Fortunately, BP has taught you to be a smart investor, and you also set aside 25% of the rent each month for vacancy, repairs/maintenance, and capital expenditures. So you put that $25 a month into a separate account. You don't count it as cash flow (or at least, I wouldn't), but it DOES still count as profit until you actually spend it on an expense.

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Ian Kee
Investor · Milwaukee, WI · Member since 2015 · 130 posts · 60 votes
6y
It depends on your point of view. Cash flow as a concept is the money that flows in and out of your business. Cash flow as a thing is the money leftover after all expenses are paid...which is definitely profit....aka net income.
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Nicole Heasley Beitenman
Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
6y
Look at it this way:
Say you have a property that rents for $500 a month. The mortgage payment, including taxes and insurance, is $350 a month. You pay the property manager 10%, or $50 a month.
That means you have $100 a month left over as profit.
Fortunately, BP has taught you to be a smart investor, and you also set aside 25% of the rent each month for vacancy, repairs/maintenance, and capital expenditures. So you put that $25 a month into a separate account. You don't count it as cash flow (or at least, I wouldn't), but it DOES still count as profit until you actually spend it on an expense.
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Frank Jiang
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
6y
Cashflow is not profit. There are cash outflows and accruals that need to be done to truly get to profit. Profit is also a far more valuable metric than cashflow if you can do the extra legwork.

Things you need to add back to cashflow to get to profit:

- Principal payments on debt. These add to your balance sheet net worth and is recouped upon divestment of the property.

Things you need to subtract from cashflow to get profit:

- Accrual for capital expenditures and maintenance (sometimes referred to as reserve)

- Accrual for future vacancy
- Depreciation if you are accounting for taxation purposes
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