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Profit and cash-flow are related financial measurements in accounting but they are not directly linked. Profit is a measure of an company's ongoing sustainability while cash-flow is a measure of the company's ability to pay its bills as they become due. See, the cash-flow for a particular period is the closing cash balance arrived at after deducting the cash-out (paid) from the cash-in (received). Profit on the other hand, is the amount that remains after deducting from the revenue earned, the expenses incurred in earning that revenue. Now in accounting, something is only expensed when the economic value is completely used up. But in any given period, an enterprise may have spent far more in cash than was actually expensed by the accounting system. i.e. the company buys 100 x $10 reams of paper to take advantage of a supplier's discount but only uses 50 reams during the financial reporting period. So while the company outlays $1,000 in cash, it only expenses (uses up) $500 in the financial reporting period.Similarly in revenue, a company may make sales revenue of $1,000 for the same financial reporting period but if 50% of those sales were made to customers who used their company credit accounts (accounts receivable), then the company would only receive $500 in cash in this financial reporting period. The other $500 would be owed to the company by the customers who will pay the amount in a future reporting period.Using this simple and rather restricted example, you can see how a company can make profit but still be cash-flow negative:
This discrepancy in the measures between profit and cash-flow is caused primarily by timing differences.
The example above highlights two areas (investing in consumables and offering company credit to customers) where profit and cash-flow doesn't directly align, but there are others. For example:
By increase their Account recievable or decrease libaility?
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