๐ ๐๐๐๐๐๐๐๐ ๐๐๐๐๐ ๐๐๐๐๐๐๐๐ ๐๐๐๐๐๐ – 2/10
๐ก๐ย ๐๐ก๐ ๐๐๐ซ๐๐๐จ๐ฑ ๐จ๐ ๐๐ซ๐จ๐๐ข๐ญ ๐๐ง๐ ๐๐๐ฌ๐ก ๐ ๐ฅ๐จ๐ฐ: ๐ ๐๐ฎ๐ฌ๐ข๐ง๐๐ฌ๐ฌ ๐๐๐๐ฅ๐ข๐ญ๐ฒ ๐๐ก๐๐๐ค ๐๐ก
๐กHave you ever wondered why some businesses, despite reporting robust profits, still encounter liquidity crunches? Let’s demystify this paradox today!
๐ง๐ย ๐๐ซ๐จ๐๐ข๐ญ โ ๐๐๐ฌ๐ก ๐ ๐ฅ๐จ๐ฐ: A common misconception in the business world is that profit directly translates to cash in the bank. However, profit, an accounting concept reflecting revenue minus expenses, doesn’t always equal the actual cash available.
๐ Why the Disconnect?
๐๐๐๐จ๐ฎ๐ง๐ญ๐ฌ ๐๐๐๐๐ข๐ฏ๐๐๐ฅ๐: Sales made on credit boost profits but don’t increase cash until paid.
๐๐ง๐ฏ๐๐ง๐ญ๐จ๐ซ๐ฒ ๐๐ง๐ฏ๐๐ฌ๐ญ๐ฆ๐๐ง๐ญ๐ฌ: Purchasing inventory is a cash outflow not immediately reflected in profit.
๐๐๐ฉ๐ข๐ญ๐๐ฅ ๐๐ฑ๐ฉ๐๐ง๐๐ข๐ญ๐ฎ๐ซ๐๐ฌ: Investments in long-term assets can strain cash reserves, despite potentially not affecting profit immediately.
๐๐ข๐ฆ๐ข๐ง๐ ๐๐ข๐๐๐๐ซ๐๐ง๐๐๐ฌ: Expenses incurred may not be paid immediately, affecting cash but not profitability in the same period.๐ก This disparity can lead businesses to face liquidity issues, unable to cover short-term obligations despite being “profitable.”
๐Imagine a company that makes a massive sale on the last day of the fiscal year. The sale boosts the annual profit figures, yet the cash hasn’t been received by year-end. The result? The company appears profitable but may not have the liquidity to pay its year-end bonuses or suppliers.
๐ Understanding the difference between profit and cash flow is crucial for business leaders. It’s vital to manage both effectively to ensure not just profitability but also liquidity and operational continuity.
๐How do you manage the balance between profitability and liquidity in your business? Have you encountered challenges related to this? Let’s share experiences and strategies that have worked for us.
