PAT vs Cash: Why Profit Is Not Cash

1PAT is an accounting residual

Profit after tax (PAT) is what remains on the profit-and-loss statement after a period's revenues and expenses, including tax. Helio's Year 1 sales are 100. After cash-like operating costs of 70, EBITDA is 30. Depreciation 8, interest 2, and tax 4 then leave PAT of 16.

That 16 is a residual of accounting rules for the period. It is not a pile of 16 sitting in Helio's bank account. Some of the sales have not been collected; some of the costs never left cash this year; some of the costs have not been paid yet.

Figure. Each bar is what survives the next cut: 100 of sales, 30 of EBITDA, 16 of PAT. The missing height is costs, depreciation, interest, and tax — not a statement that 16 of cash arrived.

How it works

1. Name the periodPAT answers how much accounting profit the year produced, not how much cash arrived.
2. Walk the P&LSales down through costs, depreciation, interest, and tax to the residual.
3. Refuse the shortcutDo not treat the residual as cash until the cash-flow statement agrees.

2Depreciation cut PAT without leaving the bank

Depreciation spreads the cost of a plant over the years it is used. Helio charged 8 of depreciation in Year 1, which reduced PAT, but no 8 left the bank for that line. The cash went out in some earlier (or this year's) capex, which lives on the cash-flow statement as investing, not as this P&L charge.

So the usual first repair when walking from PAT toward cash is to add depreciation back. Helio: PAT 16 plus depreciation 8 is 24 before working-capital moves.

Figure. The 8 of depreciation is restored because it never left cash this year. 16 plus 8 is the 24 subtotal before receivables, inventory, and payables move.

How it works

1. See the chargeDepreciation reduced this year's PAT.
2. Ask about cashDid cash leave this year for this line? Usually no.
3. Add it backPAT plus depreciation is the first cash-flow repair.

3Receivables: sold, not yet collected

When Helio books a sale on credit, PAT can rise on the invoice date. Cash rises only when the customer pays. Helio started Year 1 with receivables 12 and ended with 18, so 6 of this year's sales are still sitting with customers.

Cash collected from customers is opening receivables plus sales minus closing receivables: 12 + 100 − 18 = 94, not the 100 of sales. The extra 6 of receivables is why PAT overstates cash until you subtract the increase.

Figure. Helio booked 100 of sales and collected 94. The 6 still owed is the receivables increase — in PAT, not yet in cash.

How it works

1. Read both datesOpening 12, closing 18 — receivables rose 6.
2. Translate the riseSix of Year 1 sales have not arrived as cash.
3. Subtract the riseOn the PAT-to-cash walk, rising receivables reduce operating cash.

4Inventory ties cash; payables delay the outflow

Inventory is product Helio has paid to make or buy and has not yet sold. Helio's inventory rose from 10 to 14, so 4 of extra cash is sitting in the warehouse. That 4 reduced operating cash even though it is an asset, not a P&L loss.

Payables are the mirror: Helio delayed paying suppliers, from 8 to 11. That +3 is cash Helio has not yet sent, so it helps operating cash. Rising inventory consumes cash; rising payables provide it — until suppliers must be paid.

Figure. Helio tied up 4 in extra stock and delayed 3 of supplier payments. The pair drained 1 of cash — on top of the receivables rise already counted.

How it works

1. Inventory upMore stock means cash already spent, not yet recovered by a sale.
2. Payables upA delayed supplier payment is a short-term cash loan from the supplier.
3. Net the pairHelio: inventory consumed 4, payables provided 3, net −1 of cash.

5The PAT-to-OCF bridge

Operating cash flow (OCF) is cash generated or consumed by the core business in the period. The common indirect walk starts at PAT and repairs it: add depreciation, subtract increases in receivables and inventory, add increases in payables.

Helio Year 1: 16 + 8 − 6 − 4 + 3 = 17. PAT was 16; cash from operations was 17. They are close this year. They will not stay close — Year 2 in the next topic is the divergence. PAT is not cash in the bank; OCF is the cash the operations actually moved.

How it works

1. Start at PATHelio 16.
2. Add non-cash chargesDepreciation 8.
3. Adjust working capitalReceivables −6, inventory −4, payables +3.
4. Read OCF16 + 8 − 6 − 4 + 3 = 17.