Why cash flow is not profit….
Profit is total revenue minus total costs (fc + vc).
Revenue comes from customers.
Not all cash comes from customers.
Cash could be received in the form of a bank loan.
Cash (revenue) from customers is recorded as it is received.
So, credit sales are not recorded as cash (revenue) until the money is paid.
But, credit sales can be included in calculating future profit levels.
Profits are calculated in the ‘Statement of Comprehensive Income’.
Cash is shown in a cash flow statement.
Cash is only recorded when money changes hands.
It will only be recorded in the statement once the business has 'actually' received money, rather than what it is 'promised' to receive.
Revenue comes from customers.
Not all cash comes from customers.
Cash could be received in the form of a bank loan.
Cash (revenue) from customers is recorded as it is received.
So, credit sales are not recorded as cash (revenue) until the money is paid.
But, credit sales can be included in calculating future profit levels.
Profits are calculated in the ‘Statement of Comprehensive Income’.
Cash is shown in a cash flow statement.
What Is a Cash Flow Statement?
The statement of cash flows, or the cash flow statement, is a financial statement that summarises the amount of cash entering and leaving a company.
It will only be recorded in the statement once the business has 'actually' received money, rather than what it is 'promised' to receive.
For instance, if a business makes sales which are 10% on cash and 90% on credit.
The cash flow statement will only record the money received for the "10%" of sales and it will record the rest of the "90%" when it has 'actually' received this money.
The cash flow statement will only record the money received for the "10%" of sales and it will record the rest of the "90%" when it has 'actually' received this money.
On the other hand when we calculate profit, we will include the cash as well as credit sales, which means all of the sales made.
This shows that the business is profitable but it will actually be short of cash.
Some other cases where profitable business can run out of cash are :
a: purchase of an fixed asset (through cash)
b: over-trading
This means to engage in more business than can be supported by the market or by the funds or resources available.
Cash flow is vital in the short run and profit is vital in the long run.
Therefore, cash is important in the short run as it is needed to pay creditors and workers. Without sufficient cash, creditors (in extreme cases) can take you to the court and declare you bankrupt or insolvent in case of companies.This shows that the business is profitable but it will actually be short of cash.
Some other cases where profitable business can run out of cash are :
a: purchase of an fixed asset (through cash)
b: over-trading
This means to engage in more business than can be supported by the market or by the funds or resources available.
Cash flow is vital in the short run and profit is vital in the long run.
See this video: http://news.bbc.co.uk/1/hi/business/7874984.stm
Workers who will not be paid on time will be demotivated, resulting in poor productivity, high absenteeism and labour turnover.
Profits are essential for the long term survival of the business.
Nobody would be interested in investing in a business which yields them a very low or negative return.
