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Cash flow v ProfitUnit 19
What’s the difference between cash flow and profit? Financial item Cash Inflow? Revenue?
Cash sales made to customers y Y
Credit Sales made to customers
Capital raised from share sales
Charging rent on flat upstairs
$20,000 bank loan
Carry out a sale and leaseback
Cashflow and Profit
• When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or even the survival.
• Bear in mind that more businesses fail for lack of cash flow than for want of profit.
Cash Flow vs Profit
• Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows.
• The net result is that cash receipts often lag cash payments and,
whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits.
Analyse these figures…
Income Statement:
Month 1
Sales ($000) 75 Costs ($000) 65 Profit ($000) 10
Cashflows relating to Month 1: Month 1 Month 2 Month 3 Total
Receipts from sales ($000) 20 35 20 75 Payments to suppliers etc. ($000)
40 20 5 65
Net cash flow ($000) (20) 15 15 10 Cumulative net cash flow ($000)
(20) (5) 10 10
Figures…
• • This shows that the cash associated with the reported profit for
Month 1 will not fully materialise until Month 3 and that a serious cash short- fall will be experienced during Month 1 when receipts from sales will total only $20,000 as compared with cash payments to suppliers of $40,000.
How do the factors below influence cash and profit (p.108)
• Seasonal factors
• Credit Problems
CAN A CASH RICH FIRM BE UNPROFITABLE?
Analysis & Evaluation – P.109
• Read and make a note
• What does insolvency mean?
• Questions End of Chapter
