Why accounting profit matters to a first-time founder
Accounting profit is a common measure of performance, but accounting rules and estimates shape it as well as sales and spending. It helps founders track results and explain them to investors or lenders. Because it includes costs that do not use cash now and items recorded at different times from payment, read it alongside cash flow.
Examples of accounting profit
A studio records ₦300 million of income and ₦220 million of expenses for the year, including ₦15 million for equipment losing accounting value over time. Its accounting profit before tax is ₦80 million. Cash changes by a different amount because some customers have not paid, the equipment was bought earlier and loan money is not income.
Common misunderstanding
Accounting profit is not cash generated, taxable profit or economic profit. Tax law may change the accounting figures. Economic profit also counts what you gave up, such as a salary the founder could have earned elsewhere. A profitable company can still run out of cash if customers pay after its bills are due.
When to use it
Use accounting profit to review performance for a period, compare results with the budget and prepare financial reports. Before comparing figures, check whether each one is gross profit, operating profit, profit before tax or profit after tax. Also review cash flow, the balance sheet and profit per sale or customer.