Profit is an opinion, cash is a fact

An accrual means recording an event in the period it happens rather than the period the money moves. A sale is recorded when the goods are delivered and the customer owes for them, not when the payment clears. A cost is recorded when it is incurred, not when the supplier is paid. That is the whole idea.

The reason is that a period has to mean something. Without accruals, a month in which a big customer happened to pay would look like a triumph and the month it was earned would look empty, and the accounts would describe the timing of bank transfers rather than the trading. Accruals exist to make a period comparable to the one before it.

The phrase has circulated in finance for decades and has been attributed to several people, which usually means nobody can prove who said it first. It is a working maxim rather than a discovery, and it is worth handling as one.

It is not an accusation. Calling profit an opinion does not mean a profit figure is unreliable, invented or negotiable. It means a profit figure is the output of a set of defensible choices, made in good faith, that a different team could have made differently and still been right. It is also not a claim that cash is beyond question: the amount in the account is not in dispute, but which section of a statement a movement belongs in still is.

One sale on 75 day terms is only a delay. If the business sold the same amount every month for ever, the money from an older sale would arrive as the newer one shipped, and the delay would stop mattering after the first few months.

It stops cancelling the moment sales grow. Each month Marchmont ships more than it shipped 75 days ago, so the money arriving is always smaller than the money owed, and the shortfall widens every month. Marchmont grows 4% a month, holds 60 days of stock and pays its own suppliers in 30 days, and the result over twelve months is £445,631 of net income against minus £297,261 of free cash flow. Session 4 is entirely about that mechanism.

Money owed to the business by customers is recorded as an asset, because the sale was earned and the payment is expected. Money the business owes its suppliers is recorded as a liability for the same reason in reverse. Both are accruals, and both sit on the balance sheet waiting to turn into cash in one direction or the other.

The asymmetry matters. Marchmont waits 75 days to be paid and pays its own suppliers in 30, so it is funding the difference out of its own bank balance on every single sale. That is not a mistake. It is a commercial position, and it has a price, which session 3 measures.

Shipping a boxed instrument has an obvious date. Most sales do not. A contract with an installation phase, a calibration visit, a twelve month support wrap and an option to extend does not have a single moment at which the business has done what it promised. The revenue has to be split across the things promised, and the split is a judgement.

This is where honest teams diverge most visibly. The same contract, read by two competent accountants with the same rulebook, can produce different revenue in the current quarter and the same total across the life of the contract. Neither is wrong. The total is fixed and the timing is argued about, which is precisely what "opinion" means here.

Each of the four choices exists because the alternative is worse. Refusing to recognise revenue until every obligation in a three year contract is complete would make the first two years look dead. Refusing to capitalise anything would make the year a factory is built look catastrophic and every year afterwards look effortless. Estimates are not a weakness in the system, they are the system doing its job, which is to describe a period fairly rather than to record bank transfers.

What follows from that is a habit, not a suspicion. The useful move is to ask which judgements a figure rests on and whether they changed since last year, because a changed judgement moves profit without anything happening in the business.

Cash has less room for opinion, not none. The balance in the account is not arguable. What is arguable is presentation: which section of the cash flow statement a movement is reported in, and what is subtracted before a figure is called "free". Two honest preparers can put the same payment in different sections and produce cash flow statements that look different while describing identical bank activity.

So the saying is a comparison, not an absolute. Profit carries several layers of estimate about the future. Cash carries one layer of classification about the past. That is a real difference in kind and it is why the maxim survived, but a cash figure presented without saying what is in it is still a figure worth questioning.

There is a long running argument about whether accrual profit or cash generation is the better description of how a business performed, and it has not been settled. One camp holds that accruals are the whole point, because they match effort to result and a cash figure can be flattered for a quarter by simply not paying anybody. The other holds that estimates accumulate quietly, that the estimates are made by people with an interest in the answer, and that cash generation is the measure that cannot be talked into existence.

Both positions have decades of evidence behind them and both have famous failures on the other side: businesses that reported profit for years and collapsed for want of cash, and businesses judged harshly on cash while building something that only accruals could show. The practical position most experienced readers end up at is not a winner but a rule of use. Read them as a pair, and treat a large or widening divergence as the thing to explain rather than as a verdict on either number.