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How profits and cash flows are different

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. <br>Make sure to understand well the differences between profit and cash flow, so that you can grow your business with sufficient cash flow.

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How profits and cash flows are different

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  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 • Let’s 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 doesn’t 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 doesn’t 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 (30,000-20,000=10,000), 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, it’s 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 you’re profitable, you survive or fail based on whether you have the cash to pay the bills. That’s why it’s said- Cash Flow is King.

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