How Profits & Cash Flow Are Different - PowerPoint PPT Presentation

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How Profits & Cash Flow Are Different

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Cash flow is the way cash flows through a business as deposits and withdrawals. The profit of a business is the difference between the gross income or sales of a business and its expenses. Bringing in profits does not always increase cash instantly and incurring an expense does not always reduce cash instantly. Make sure to understand well the differences between profit and cash flow, so that you can grow your business with sufficient cash flow. – PowerPoint PPT presentation

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Title: How Profits & Cash Flow Are Different


1
How Profits and Cash Flows Are Different?
2
Profits are defined as revenue fewer expenses.
They may also be referred to as net income. Cash
flows, on the other hand, refer to the inflows
and outflows of cash for a particular
business. Bringing in profits does not always
increase cash instantly and incurring an expense
does not always reduce cash instantly.
3
Example
  • Lets assume that company A manufactures and
    distributes lawn mowers to the stores and other
    retail outlets. Following are the differences
    between profit and cash flow

4
1. Revenue Generated
  • Company A sells an INR 30,000 lawn mower to a
    retail store on June 1st, and emails an invoice.
    The business posts INR 30,000 in revenue, but the
    retailer doesnt pay the invoice until June 30th.
    Revenue is posted immediately in the accounts but
    cash is not collected for 30 days.

5
2. Expense Incurred
  • Company A sells an INR 30,000 lawn mower to a
    retail store on June 1st, and emails an invoice.
    The business posts INR 30,000 in revenue, but the
    retailer doesnt pay the invoice until June 30th.
    Revenue is posted immediately in the accounts but
    cash is not collected for 30 days.

6
2. Profit Recognized
  • The profit generated on the lawn mower sale is
    INR (30,000-20,00010,000), and that profit is
    posted on June 1st. In accounting terms, revenue
    can be recognized on June 1st, because the sales
    process is completed when the product is
    delivered. However, the profit of Rs.10, 000 is
    not collected in cash until June 30th.

7
  • From this example someone clearly understand that
    profit cash flow are totally different. A
    business may gain more profit and if cash is not
    there then its became very difficult to run the
    business.

8
Careful Planning of Cash flow
  • Along with having high profits as a motive, its
    important to have cash needs of your business
    with a careful planning. Make sure to understand
    well the differences between profit and cash
    flow, so that you can grow your business with
    sufficient cash flow.
  • In the long-term, one must get profitable
    eventually or find stock investors to keep
    supplying you cash to make up for your losses. In
    the short-term, even if youre profitable, you
    survive or fail based on whether you have the
    cash to pay the bills. Thats why its said- Cash
    Flow is King.
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