Business Finance
Cashflow Statement
© Timothy Price 2018
Profit vs Cash
 A profitable
business should generate cash
 But a profitable business may still meet
cashflow problems
 Certain “inflows” and “outflows” of cash do not
appear as part of the profit calculation
 These need to be managed carefully
Profit vs Cash
The accrual concept – timing differences
 Revenues
are recorded when

Goods are delivered

Services are provided
 Expenses
are recorded

To match the revenues they help to generate

Eg when goods are sold, utilities used
 Not
recorded when cash is actually received or paid
Profit vs Cash
The accrual concept – timing differences

Based on the concept that the Income Statement
should show the commercial activity of the
business in a given period

It should not reflect actual cash inflows and
outflows

Creates greater consistency in reporting
Profit vs Cash
Working Capital

These timing differences are reflected in the balance
sheet
 Sales


Expenses



Receivables – or Customer Advances
Payables – or Prepayments
Inventory bought but not yet sold
Mismanagement of these can lead to insolvency!
Profit vs Cash
Non-current Assets


These may require high levels of cash outflow at the
outset
Will only appear in profit later as a depreciation
expense
Profit vs Cash
Depreciation
A “non-cash” item in the profit
May have a big effect, ie profit may be low due to
high depreciation but actual cashflow is very strong




Telecoms
Energy companies
Profit vs Cash
Borrowing/repaying debts




Borrowing increases cash in the business
Repayment reduces it
Neither appears in the profit
Other than indirectly through higher or lower interest
payments
Profit vs Cash
New money from owners




Increased investment by the owners
By issuing shares if it is a company
Increases cash in the business
No impact on profit
Profit vs Cash
Distribution of profits to owners



Drawings or Dividends or Profit-sharing
Decreases cash in the business
No impact on profit
Cashflow Statement


Shows the differences between cash at the start of
period and the end
Makes the Income Statement match up with
(“reconcile to”) the Balance Sheet