Cash is a Fact, Profit is an Opinion.

Cash flow and profit are two sides of the same coin; cash flow provides the present, profit secures the future. Striving for both and striking the balance is the key to success.

“Cash is a Fact, Profit is an Opinion” is a phrase that was popularised by economist and business professor, Alfred Rappaport. The phrase highlights the difference between two key concepts in accounting: cash flow and profit.

Cash flow is the movement of money into and out of a business. It’s a fact because it’s a tangible measurement of a building contractor’s ability to generate and manage its cash resources. Positive cash flow indicates that a company is generating more cash than it is spending, while negative cash flow suggests the opposite.

Profit, on the other hand, is an opinion because it is a subjective interpretation of a company’s financial performance. Profit is calculated as the difference between revenue and expenses, but the methods and assumptions used to determine these numbers can vary greatly. For example, some companies may choose to include one-time expenses or defer certain costs, which can greatly affect the reported profit.

The phrase ‘Cash is a fact, profit is an opinion’ reminds us that while profit is an important metric, it should not be the sole focus of a contractor’s financial strategy. Instead, contractors should aim to maintain positive cash flow and manage their cash resources effectively, as this is the foundation for long-term financial stability and growth.

So while profit provides a general picture of a contractor’s financial performance, cash flow provides a more accurate representation of its current financial health and ability to operate in the near future. Contractors should focus on both, but prioritise maintaining positive cash flow over maximising profit.