What Is Cash flow? What Is Profitability?
Both profit and cash flow are key financial indicators for an enterprise. However, in general, an illusion such as “profit” or ” cash.” However, even if your company is black, cash flow may not be healthy.
Cash flow is the cash that enters and exits the business in a certain period of time. “Positive cash flow” is the “negative cash flow”. Cash is required to be paid for employee salaries and taxes; to be able to perform transactions such as the purchase of services or products. The profit is subtracted from the income of the expenses and shows a picture of the company’s general situation.
Three tables are regularly published in corporate firms: balance sheet, income statement and cash flow statement. The balance sheet shows the company’s assets and liabilities; the income statement shows the details of the source of profit and loss. Cash flow or cash flow statement shows why the company closed the period in more or less cash than the previous period. The reason why companies prepare both the Income Statement and the cash flow statement is that the cash and the profit are not equal. Cash flow may be declining while a company is raising profits.
A False Prophet: Profitability
Let’s look at the problems that getting the company’s Profitability as the company’s sole financial health indicator:
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Profit and loss are calculating based on actual sales. It doesn’t matter here if the money goes into your account or into your vault. Sales can be understanding in different ways, such as cash, credit card, check, promissory note. In the payment methods other than cash, a certain maturity must be passing in order to collect the receivable.
Profit-loss is not the whole picture of cost and expenses:
Profit is not reflecting in the loss statement until the sale of the money investing for the inventory is realizing.
You Have Expenses That Do Not Cost, But Reflected In Your Profit-Loss Table:
For example, depreciation (depreciation share) does not cause money output, but profit is included in the loss statement and deducting from your profit.
Expenses That You Cannot Follow From The Profit And Loss Statement:
According to the accounting system, Assets, Liabilities and capital items are reflecting on the balance sheet. However, these are the items that will make you spend money.