The Difference Between Cash and Profits

In my article "Cash flow that you really need to understand", I pointed out that most people think of profits rather than cash.

When you imagine a new business, you think about the cost of making the product, the products you can sell, and the profit per unit. We are trained to handle the business as profit, that is, sales minus expenses and expenses

But we do not profit for commercial purposes. spend money. Companies with high profitability will go bankrupt as all money can not be paid collectively in assets. Working capital is essential for business health

Unfortunately, we are not able to grasp the impact of cash clearly at the present moment. This is one of the biggest reasons for proper business planning. We must manage cash and profits

From there I emphasized a number of important cash flow factors including account sales, inventory and payment invoices.

In this article I would like to examine the meaning of "real" business. The case is Garrett's Bike Shop, a bicycle store located in a medium-sized local market with annual turnover of about $ 400,000.

The first chart below shows the store's main sales performance over a period of several months. You can see sales, direct expenses, expenses and profits

Let's compare this with a simple cash flow forecast. Suppose the store accounts for 90% of sales (later payment) and the customer waits 2 months for these invoices (in the case of a bicycle store, the hat does not). General, yes, but this is a common event for most existing enterprise vs company companies)

Furthermore, Garrett presumes that you need to keep sales for about a month as goods (called inventory) in stores that customers can purchase and purchase these items before sale. As a result, the cash flow will not be the same as the profit, as shown in the following figure.

In this case, the difference between the profit and the cash of a company selling about 30,000 dollars a month is over 90,000 dollars. Although this business raises profits, it will go bankrupted due to shortage of cash

Changes in these two scenarios are just cash flows, not pennies of sales, cost of sales, and expenses. No price change, no new employee added, no wage change

The key to understanding the difference between the two statements is to understand the difference between cash and profits. The easiest way to think about it is when you are selling. If you need to send an invoice to the customer and then your client needs 30 or 60 days to pay the invoice, you will not receive cash immediately from sale. However, we will reserve a sale in the profit and loss statement and display the profit for that day on the date of sale. A typical cash flow statement begins with the amount of cash you have and increases the amount of cash received through cash sales and payment invoices, then draws the cash you pay when you pay your bills I will. This will leave your total cash flow (cash minus cash) and exit cash start cash + cash - stop cash use = exit cash)

Cash flow is the difference between the amount received by the company and the amount paid, profitability is the difference between revenue and expenses. The company reports cash holdings and profitability. Profitability is an accounting concept that is not measured in cash received or cash paid. Profitability is the result of accrued revenue and accrued expenses recorded regardless of cash transactions. While other cash flows may not be part of the business activities and therefore are not related to income, certain cash flows can not be recorded as revenue or expenses at the time of the transaction.

Cash flow is simply the difference between the rental income and the cost of the investment real estate. Cash flow can be either positive or negative. Clearly, the most profitable investment in the real estate industry is an investment that generates positive cash flow. If the cash flow is negative, it means that the cost exceeds the rental income. This is the reverse of revenue. In order to determine the most profitable real estate investment to generate positive cash flow, real estate investors conduct real estate market analysis and analyze all possible expenses (rent real estate tax, real estate management fee, utility fee, maintenance fee Etc.) must be calculated. In addition, real estate investors need to accurately plan their financial situation and make it wisely spending to ensure that rental property creates and maintains positive cash flows after purchasing investment property there is.