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It is quite possible to have profit but no cash

appens because of the accouting principles. The


ow statement and the profit is mentioned at the
ultiple scenarios in which a company would show
e cash. It would be beneficial to discuss these

in a business or a copamny. It h
cash is mentioned at the cash fl
income statement. There can be m
positive profit but will not hav
kind of scenrios.

The income statement shows revenue as the top line and profit at the bottom line
. The GAAP based accounting principles are receommended by the government while
making various accounitng statements. Many times businessmen use these princople
sfor their benefit instead of using them in best spirits.
A company can sell on credit to the customers. In this case, the seller will not
get the money right away abut will get it in next few days or months as per the
credit policy. As the material is sold, the company will still recognize it in
the revenue (i.e. the income statement). The effect of this transaction will be
reflected across the income statement across various headings like gross profit,
operating profit, net income etc. As the revenue is increased, so each of these
items will also be increased. In this way the profit will increase but the comp
any would still be waiting for the actual money to be received from the customer
(as transactionw as made on credit). This transaction will result in account re
ceivable that is shown on the balance sheet. In the absence of cash, the csah fl
ow statement will not affect and the cash amount will not change. In this way, t
he cash will not be there but the profit will be positive.
When the company sells on credit then the company would still be paying money to
the supplier for procuring the raw material. If it does not pay money then the
supplier wont supply other raw material and the company would face more losses.
Moreover, it would still need to make similar products and sell to other custome
rs who pays on time in the form of cash. Thus, company will spend cash and the c
ash flow will go negative. In this case, the income statement is positive, profi
t is there, but there is no cash (as it is yet to be reeived from the customer).
As per the accounting process, the cost of goods sold shows the costs allocated
fro the products that are sold. But a company would have various tyoes of inven
tory like raw material, work in progress, finished good but yet to be sold etc.
The company will have blocked cash in these inventory items but they are not yet
sold and hence company cant realize money back from them (till they are sold).
The "Cost of Goods sold" on the income statement is allocated for only those pro
ducts which have been sold off in the revenue. Thus, work in progress inventory
etc. will not be reflected in the COGS as it is not yet sold. In this case also,
cash will be negative but profit might be there.
Another scanrio that shows positive profit but negative cash flow is the case wh
en company puts money in a large project nad make huge capital investment. In th
at case, the company would pay the money upfront for various items, say equipmen
t procurement etc. These equipments will be expensed over the period of their us
eful life in the name of depreciation expense. Now, the profit will be rediced b
y a small amount of depreciation, but the cash flow is reduced byu the whole amo
unt of equipment of he project. Thus, investing cash flow will be negative. and
operating cash flow will be positive. OVerall, the cash flow will be neagtive an
d the income statement profit will be positive.
This shows that a compan can face many scenarios when the profit is positve and
there is no or ngative cash. The busines sowners should work cautiously and shou
ld avoid these kind of situations using effective business strategies and balanc
ed credit policies.