What "profit" means on four different reports

"How much did we make last year?" sounds like a question with one answer. Ask four different people holding four different documents and you will get four numbers, sometimes wildly apart.

This is not sloppiness. Each document is built for a different purpose and deliberately measures something different. The mistake is not that they disagree — it is using one of them to answer a question it was never designed for.

The same year, four ways

Net income: what the business earned

The accrual bottom line. Revenue when earned, costs when incurred, regardless of when money moved. This is the honest measure of performance, and it is the one to use when comparing months, judging whether pricing works, or assessing whether the business model functions.

What it will not tell you is whether you can make payroll. It contains non-cash charges like depreciation and it ignores cash movements like loan principal entirely.

Taxable income: what the code says

Lower here, and that is normal. Tax rules allow deductions your books do not — accelerated depreciation on equipment being the usual large one — and disallow some costs your books include, like a portion of meals.

A persistent gap between book and taxable income is expected and your accountant will keep a schedule reconciling them. It is worth understanding roughly why yours differs, because a large unexplained gap is occasionally a bookkeeping error rather than a tax adjustment.

Cash generated: what actually arrived

The most sobering of the four, and the one owners feel most viscerally, because it matches the bank account. Net income of $186,000 producing $61,000 of cash is not a contradiction; it is the working capital and capital spending that the P&L never showed.

Use this one for anything involving survival: can we make payroll, can we afford the hire, can we service the loan. It is the only measure that answers those.

Adjusted EBITDA: what a buyer values

The highest of the four, because it strips out interest, taxes, depreciation and amortisation, then adds back owner-specific and non-recurring items. A buyer is trying to see what the business would earn under someone else, so your above-market salary, the vehicle, and genuinely one-off costs get added back.

Treat it with care. It is the right lens for a sale conversation and a terrible one for running the business, because the things it excludes — interest, tax, and the need to replace equipment — are all real cash you have to find. A business managed to EBITDA can look excellent while quietly failing to fund its own asset replacement.

Which to use when

• Is the business working? Net income, compared month over month.
• Can we afford this? Cash generated, and the forecast underneath it.
• What will we owe? Taxable income, with your accountant.
• What is it worth? Adjusted EBITDA, with the add-backs documented.

The failure mode is picking whichever number is most flattering for the question at hand. Owners quote EBITDA when discussing value and cash when declining a raise, and both can be honest — but only if you know which question you are actually answering.