Distinguish Between Money Cash Flow And Real Cash Flow

The Cash Flow statement helps to see how money flows in or out of the company.

Commonly, startups and small/medium-sized companies cease their operation due to a lack of cash. It could be challenging to understand the reasons, especially if a company shows good theoretical profit in the P&L. Why is that?

For many CEOs, it might not be easy to understand the whole connection. The reason is that there is a 'theoretical profit' according to the Income Statement and a 'real cash profit' according to the Cash Flow.

Distinguish
  • The outflows occur when a company repays loans, purchases treasury stock or pays dividends to stockholders. As the case with other activities on the statement of cash flows depend on activities rather than actual general ledger accounts. Table of Difference between Funds Flow Statement and Cash Flow Statement.
  • We can think of three different types of activities which cash flow investors can engage in. The first type is a cash flow activity which generates real cash outflows. Examples of this type of activity include deducting expenses from your income, paying bills or investing in property. The second type is cash flow activities which.

Real cash flow can be useful for analyzing a company's current cash flow in relation to the past. For example, let's say that a certain company had cash flow of $10 million in 2000, and expects.

The profit results shown in the Profit and Loss or Income Statement are more or less theoretical. For example, a company recognizes a profit at the moment when it sends an invoice to a customer. But it can take a week, fortnight, a month, or even longer until the customer pays the invoice. Unfortunately, sometimes the invoice is not paid at all.

The same discrepancy happens on the cost side. When a company receives an invoice, it is usually shown and reported as an expense. But in reality, it takes some time until the invoice is approved, processed, and funds are sent to a supplier.

Cash

There's an apparent discrepancy between a profit (or a loss) that should happen and a profit (or loss) that really happens. The Cash Flow statement shows PURE and NET cash inflows or outflows, not impacted by accounting thinking. On the other hand, the Income Statement shows profits (or losses) according to accounting policies on an accrual basis.

The main differences between the income statement and cash flow statement are captured below:

Income Statement Cash Flow Statement

On accrual basis On a cash-flow basis

About profitability About liquidity and solvency

Follows accounting rules Fewer policies to follow

Refers to accounting records Refers to bank statement records


As a result, we can witness significant differences between the Income Statement and Cash Flow. A company can often disclose million $ profits per the Income Statement while it has no funds at all on the bank account.

We can all imagine what destructive impact would be if a company does not have funds to pay rent or salaries, even though disclosing it has money in theory. Such a situation can be only clear from the Cash Flow statement while looking at the Income Statement can be falsely assuring.

It is like a car dashboard. To keep the car smoothly running, we need to look at the BOTH speedometer to monitor our vehicle's speed AND the tachometer to measure the engine's revolutions per minute.

Onward and financially upwards,

Tomas

[email protected]

Cash Flow Statement Example

PS – Whenever you're ready, here are ten ways I can help you become a financially savvy CEO:

  1. My three-month 'Financially Savvy CEO' program will take you from zero to financial hero. Respond with 'FS' in the subject line, and I’ll fill you in on details.
  2. For those who prefer a fast and rapid one-month version of the above, respond with “FOUNDATION.”
  3. Consult with me one-on-one on a range of financial topics that will up your financial intelligence and make you a better leader. Respond with 'CON', and I will send you more information.
  4. If you still don’t have the book sample of “DEC$DED - How CEOs become Financially Savvy”, respond with “BOOK”
  5. Join my newsletter to receive regular reflections, tips, and tools. If you’re interested in learning more, respond with “NL” and I’ll add you to the gang.
  6. Get a copy of an executive summary discussing my recent extensive international research on the main problems of CEOs and CFOs. For a pdf version, respond with “PROBLEMS”.
  7. Join our private group on Facebook here. It's a great place to get great ideas, ask questions, and hang out with other CEOs.
  8. Respond to me via email: [email protected]
  9. To learn more about me, visit my LinkedIn profile.
  10. Check my Facebook page Your CFO


Distinguish Between Money Cash Flow And Real Cash Flows


Flow

What Is The Difference Between A Cash Flow Forecast And A Cash Flow Statement