Entrepreneurship, Second Edition

11.13. Planning Cash Flow and Planning Profits

Although there is a relationship between them, cash flows are not the same as profit. Profit is an accounting concept designed to measure the overall performance of the company. It is a somewhat nebulous concept, open to variations in measurement techniques and accounting conventions, each of which produces somewhat different results, which are then open to different interpretations.

In contrast, cash flows are not always a direct measure of a company's performance. For example, take two opposite extremes: a young, profitable company sinking as many funds as it can get into a new venture and an old, unprofitable company heading for bankruptcy. The results in terms of cash flow are likely to be the same: declining cash balances. A company can earn a handsome profit and have a net cash outflow in the same month if it pays for new capital equipment in that month. It can equally well show substantial loss and an increased cash balance in one month if the results of new financing or the proceeds from the sale of substantial fixed assets are received in that month.

However, the concept of cash is not nebulous: Either the company has a certain amount of cash or it does not. And a lack of cash is critical. A company can sustain losses for a time without suffering, but a company that has no cash is insolvent and in imminent danger of bankruptcy, no matter what its profit picture may be.

Thus, many financial transactions that do not enter into ...