Is it Possible for a Company to Have a Profit & a Negative Cash Flow?

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Accounting reports both a company's profit and cash flow. The first comes from the income statement and the second from the statement of cash flows. Each of the items report different figures. This makes it possible for a company to report a healthy profit while having a negative cash flow. Though, in most cases, this is an unsustainable business model.

Revenue vs Cash Flow

  • Companies can experience copious sales revenue and low cash flow by selling goods and services on credit. This allows customers to pay off their bills over a period of time. Under accrual accounting, companies must record the sales transaction when it occurs rather than when payment is received. This increases sales and accounts receivable, but not cash. At month's end, a company may discover it has high sales revenue with no cash improvement. High cash outlays by the company during that same period can result in negative cash flow.

Profit

  • The income statement reports an accounting figure that represents profit. It is not a tangible item that a company can touch or feel, like cash received from operations. The reason this occurs is because of the accounting adjustments made to the income statement. Accruals and deferrals represent items the company expects to occur in a different time period. Non-cash expenses like amortization and depreciation can also alter the profit a company reports.

Cash Flows Report

  • The statement of cash flows is necessary to report the major sources and uses of a company's capital. Companies use this statement to determine how well they generate cash from operating activities. Using the income and cash flows statements together allows accountants to identify areas where a company spends excessive capital or does not collect cash from sales. The company's management team can correct these actions through decisions to alter the cash flow outcome.

Considerations

  • One way to negate short-term cash flow problems is to use a credit line to help pay for operations. This will finance the company without incurring interest expense in the current period. However, not paying off an outstanding balance will incur interest expense in later accounting periods. So, while this will improve the cash-flow situation in the short term, it will create a negative cash flow in the long run, potentially creating more problems.

References

  • "Intermediate Accounting"; David Spiceland, et al.; 2007
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