Accounts Demystified, 6th Edition

t h e p r o f i t & l o s s a c c o u n t a n d c a s h f l o w s t a t e m e n t

45

The cash flow statement

Let’s now go back to your fortune hunting for a moment, Tom. Suppose

you have discovered that Sarah’s current net worth is actually £10m, having

risen from £9m this time last year. You have seen the equivalent of her

P&L which shows that this rise in her net wealth is due to all the interest

on money in various deposit accounts. In short, you expect this increase in

her already vast wealth to continue. How would you feel about her?

I’d be down to the jewellers in a flash, although I have the feeling you’re going to tell

me that would be a mistake.

I’m afraid so. Let me give you some more information about Sarah. Most of

her money is tied up in a ‘trust’ set up for her by her wealthy grandparents.

All the interest on this money is kept in the trust as well. Although Sarah

is the beneficiary of the trust and therefore effectively owns all the assets in

it, she is not allowed access to them for another 10 years. Meanwhile, she’s

more or less out of ready cash and is going to be penniless for those 10 years.

How would you feel if you married her and then learned about this situa-

tion, Tom?

Sick as a parrot, I imagine.

Precisely. My point this time is that an individual or a company can be

rich and getting richer, but at the same time the cash they have to spend

in the short term can be running out. However rich you are, you can’t sur-

vive without cash to spend.

I take the point, but I don’t quite see how this would happen to a company.

Take SBL as an example. In Transaction 7, SBL sold stock for £30,000

but agreed that the customers need not pay for a while. As we saw, this

made the shareholders richer, but did not immediately bring in any cash.

Later, in Transaction 11, some of this cash was collected. If it hadn’t been,

though, and SBL had still been obliged to pay its suppliers, SBL would

have run out of cash completely.

Far more small companies go out of business through running out of cash

than by being inherently unprofitable.