Why we start with profit for preparing cash flow statement?

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krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

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It is not necessary to start with cash flow statements. Cash flow statements are prepared to determine and plan for requirements of money in a firm or an organization for a specific period.

Profit represents increase in net worth of an enterprise, which may not always be in the form of cash. For example, a company may earn a good profit on increased sales, but to increase the sales it may have resorted to selling on credit, so that increase in net worth of the company may all be represented by increase in the accounts receivable rather than cash in hand or in bank. It is interesting to note that frequently the companies that are growing in terms of its business volume, and are therefore making increasingly higher profits, are more likely to to experience short and medium term shortage of cash funds than a company with stable or reducing business volume. This is because a firm with growing turnover needs to increase its investment in current assets such as inventories and accounts receivable.

giorgiana1976's profile pic

giorgiana1976 | College Teacher | (Level 3) Valedictorian

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Cash money are that money which you find in the bank or company. There is always need of cash: to pay salaries, rent, taxes.

A large profit does not mean that there is more cash.

A lesson that all entrepreneurs have to learn the difference between cash and profit. Profit is that money you expect to exist in the organization if all customers pay on time and if properly shared costs for the period. Cash money are those that must always be to ensure smooth business activity, with the ultimate goal of obtaining profits.

In the long term, the profit of a firm may be very small if cash has not a positive level.

The basic rule is: "You can not spend profit spend money!"

Cash-flow refers to the ins and outs of money in the company for a period of time. The management of these inputs and outputs of cash is one of the main tasks of an entrepreneur. Outputs are measured by cash receipts issued when paying salaries, rent and creditors. Entries are that money received  from clients, borrowers and investors.

The ratio between cash flow and turnover is an indicator of short-term profitability of a company.

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