Congratulations! You’ve made a profit. So why don’t you have any cash? Barb Nuss explains the difference between profit and cash, and how the statement of cash flow demonstrates where the cash went.
Why the Statement of Cash Flow Is Often Overlooked:
Many business owners find it challenging due to lack of familiarity, making it seem more complicated than other financial statements.
The Big Question It Answers:
“If I made that much profit, where is the cash?” — This statement reveals the actual movement of cash in and out of the business.
Inventory’s Impact on Cash:
An increase in inventory reduces available cash, even if it doesn’t immediately affect profit.
What’s in the Financing Section:
Includes transactions related to loan proceeds, loan repayments, and owner distributions — all of which directly affect cash flow.
The Timing Disconnect Between Profit and Cash:
Cash doesn’t always move at the same time revenue or expenses are recorded; this timing gap can mislead business owners about their true financial position.