Why Cash Surplus Does Not Mean Spendable Profit

0 Comment

Guest post by Peter Baskerville. Read the original post on Quora: How is it possible that cash flow generated by operations could be greater than net profit?

This is a common dilemma that small business owners often mismanage … the fact that excessive cash at bank does not necessarily mean profit that the owners can use.

It’s all about the timing. See cash from sales for most businesses happens daily and builds up in the bank account over time. But the expenses incurred in making those sales is rarely paid out on a daily basis from the bank account and is more likely paid at the end of the week for expenses like staff and supplies, at the end of the month for expenses like rent and electricity, and at the end of the year for expenses like taxes and accounting fees.

So cash flow from operations is always greater than net profit simply because there is a timing delay between an expense being incurred and an expense actually being paid from the bank account. This delay causes the cash at bank to always be much higher than the actual profit earned.

Also, not all expenses that reduce profit, impact on cash. For example, depreciation on equipment and amortization on intellectual property rights. While these expenses reduce profit they don’t impact in any way on the cash flow causing the cash flow to be greater than the net profit.

Organization—sign up free

Nav offers an easy way to keep your whole credit life organized. View your personal and business credit together in one account. Sign up for free.

Rate This Article

This article currently has 4 ratings with an average of 5 stars.

About the Author — Ashley Sweren is a freelance marketing writer and editor. She owns her own small business, Firework Writing (http://www.fireworkwritingonline.com/), located in San Jose, California.

Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.

Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

Leave a Reply

Your email address will not be published. Required fields are marked *