Understanding Cash Flow Part 2

Many people equate cash flow with profit. This is not so. Profit is the accounting term for the difference between the revenues and the expenses. Expenses are not necessarily cash and revenues may not have been received yet such as receivables. In small businesses, cash basis of accounting is preferably used i.e. only actual receipts are reported are revenues and only payments made in cash are deducted as expenses. Let me illustrate: For example a total sales of $ 5,000 has been made which is 2,500 cash and 2,500 in receivables. Expenses amounting to $ 3,000 was paid for the same period. Using the cash basis of accounting, the business will report a loss of $ 500. Sales.....................$2,500.00 Cost and Expenses..........3,000.00 Net Loss................... 500.00 If the accrual basis is used, there will be a net profit of $ 2000 excluding non-cash expenses such as depreciation. Sales.....................$5,000.00 Cost and Expenses..........3,000.00 Net Profit.................2,000.00 What is the cash flow in this example. Cash flow amounted to $2,500 while net cash inflow is negative $ 500.00. Cash outflow refers to the expenses paid. Related articles: 1. Understanding Cash Flow Part 1 2. Understanding Cash Flow Part 3 TAGS: Business,marketing,Entrepreneur,Entrepreneurship,Accounting for Small Business,Cash Flow,Deposit in Transit,Bank debits,Bank credits,Outstanding checks