Financial analysis can be challenging, especially when results show both profit and loss at the same time. This may seem counterintuitive, but it happens frequently, especially in times of crisis.
Understanding this relationship between profit and cash flow is essential to avoid making bad decisions in financial management. Check out more information in this article!
Here you will find:
Difference between profit and cash
The Inverse: Loss with Positive Cash Generation
Loss and positive cash flow: how does it happen?
Advance your knowledge in financial analysis
Difference between profit and cash
The first important point is to understand that profit and poland whatsapp data cash are not the same thing. Profit follows the accrual basis of accounting, which records revenues and expenses in the period in which they are generated, regardless of when the money actually comes in or goes out. Cash, on the other hand, is based on when the money is actually received or paid out.
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Practical examples: scenarios with profit and cash
Cash flow financial analysis
Installment sale with upfront expenses:
Imagine a company that sells a product for R$100, with a cost of R$70. Although the profit is R$30, if the sale is on credit, the money has not yet entered the cash register. However, the company paid the R$70 cost upfront, resulting in a negative cash flow of R$70, despite the profit.
Cash sale with installment payments:
Now, suppose the same company makes a cash sale and receives R$100 immediately, but only pays suppliers the following month. In this case, the cash flow would be positive, even if the profit is not high in the period, due to the deferral of payment of expenses.
The Inverse: Loss with Positive Cash Generation
In crisis situations, companies may present accounting losses, but still generate positive cash flow. One example is the case of Lojas Marisa in 2015, which, despite reporting losses, had strong cash generation.
This is because the company relies on receivables from past sales made on credit, which keeps cash flow active, even in periods of poor sales.