What is the difference between profits and cash flow?
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- What is the difference between profits and cash flow?
- Why can a company outgrow its cash?
- What is the relationship between profit margins and growth capacity?
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Solution Summary
The solution explains the differences in profits and cash flows by reference to the type of financial statement which discloses each. Examples are given of cash that is not profit, and profit that is not cash. In answer to the question about outgrowing cash, the solution lists 13 possible scenarios where this could happen. Following the list of examples are three paragraphs discussing the relationship between profit margins and growth capacity. It is a comprehensive response to an interesting group of questions.
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What is the difference between profits and cash flow? Profits are defined as net income based on accrual accounting. Not all profits are cash: for example, accounts receivable earned but not collected are profit but not cash, but proceeds from a bank loan are cash but not profits. The difference explains why there are two unique parts of the financial statements so readers can understand the difference: net income discloses profits while the statement of cash flows shows the change in cash.
Why can a company outgrow its cash? There can be many reasons, and here are some:
1. expanding too quickly
2. inadequately ...
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