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Cash Flow Management



The Distinction between Cash Flow and Profit

Equations are omitted for technical reasons - download the original pdf

Cash flow is not the same as profit, which is a very important point that will be investigated in further units. Profit is given by all sales less all costs. A positive cash flow is an increasing quantity of cash in, for example, your cash box, or your bank account. The need to distinguish between the two arises because a company can be profitable and yet experience a temporary negative cash flow. For example, when the company is expanding and buying lots of new equipment it will need lots of cash to pay for it all. The company could be basically profitable, but experiencing a substantial outflow of cash. So in this case the company's cash is running down even though it is profitable. It can also work in reverse. A company could be receiving a lot of cash from investors - for example, shareholders paying for their shares. But the company could be basically unprofitable and trading at a loss, and whilst the cash is increasing the long-term viability of the company is in serious doubt. Companies go out of business for one of two reasons: (a) they are unprofitable; (b) they run out of cash. It is extremely frustrating for a profitable business to go out of business because it runs out of cash, and the first step to avoiding this disaster is knowing how much cash is flowing in on a month by month, week by week or day by day basis.
Contents of
Cash Flow Management

1 Cash flow forecasting, cash budget
2 The Distinction between Cash Flow and Profit

Related articles: (1) Costs, Profit and Break-even Analysis, (2) Cash Flow Management