10.1 The Importance of Cash Flow

What is the distinction between profits and cash flow? Profits are an accounting measure of performance during a specific period of time. Cash flow is the actual inflow or outflow of money. One way to think about cash flow is to match it to your checking account. When you write a check or use your debit card for payments, money flows out of your account. When you deposit funds in your checking account, money flows into your account. As we all know, the balance in your checking account is not your profit or earnings. It is just the cash available to spend.

So can you spend profits? The answer is no. As stated in the chapter opening, you can only spend cash. Consider the case of a business that has had a very profitable ...

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