To calculate cash profit, the company must be utilizing cash accounting instead of accrual accounting. Cash accounting records transactions as the cash exchanges hands. This means sales sold on credit will not be a factor in cash profits. The simplest way to calculate cash profits is to compare cash in-flows to cash out-flows. As the company collects money from sales on credit, the cash profits will increase. If the company has sales on credit, then accrual accounting will usually indicate higher profits.
Add together cash in-flows from sales and any additional cash in-flows, such as interest received. For example, a company receives $100,000 in cash for the year on sales of widgets. The company also receives $300 in interest payments. Currently, the company has $20,000 in sales that have not been paid yet. The company's cash in-flows equals $100,300: $100,000 plus $300.
Add together cash expenses paid. The company must actually pay these expenses. They cannot remain as a payable account. For example, the company has $40,000 in expenses it paid and still owes $30,000. Only the $40,000 will go toward cash profits because it is the only account where cash is paid.
Subtract cash out-flows from cash in-flows to calculate cash profits. In our example, $100,300 minus $40,000 equals cash profits of $60,300.
Carter McBride started writing in 2007 with CMBA's IP section. He has written for Bureau of National Affairs, Inc and various websites. He received a CALI Award for The Actual Impact of MasterCard's Initial Public Offering in 2008. McBride is an attorney with a Juris Doctor from Case Western Reserve University and a Master of Science in accounting from the University of Connecticut.