Cash Flow

  

Categories: Stocks, Accounting

Cash is like water, always moving. It's flowing and ebbing, sometimes just trickling, its way around. Cash flow just refers to the process of money moving in and out of a business. It involves cash inflows, or money flowing into your business from customers and sales. There's also (unfortunately) cash outflows, like the cash you have to pony up to fix that radiator again. (Also, salaries, utilities, raw materials, etc.)

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Finance: What is cash flow v earnings?17 Views

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Finance allah shmoop what is cash flow versus earnings Okay

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you think profits or profits right Well not unless you

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spell it P r o p h e t s

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Ask a gandhi or jeff bezos about that All right

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Well in the land of accounting there are aptly named

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accounting profits and there are also cash profits and the

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two of them are often very different Accounting laws skew

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things when it comes to assessing riel cash profits Here's

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out the ceo and founder of give a dog a

00:35

drone A company that specializes in engineering remote control toys

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for your pets built a drone stamping factory for one

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hundred million dollars knowing that it will be worth twenty

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million dollars in scrap value in just four years Well

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he'll sell at that point and possibly upgrade if demand

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for puppy and kitty tech is still high will drone

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sales or steady producing cash profits of fifty million bucks

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a year each year into the foreseeable future but stated

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earnings and cash flows here are very different In the

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first year when the factory was built the company lost

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big cash money because it had to write one hundred

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Million dollar check to the builder of the factory Yes

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it made fifty million in profits but that year it

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lost fifty million dollars in cash Luckily it had no

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debt and it had one hundred twenty five million dollars

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in the bank Well that bank account went down to

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just twenty five million when they wrote one hundred million

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dollar check But it gradually filled back up to seventy

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five million by the time that year was done fifty

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million of profits and that fifty million in cash Yeah

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that that helps that floated right back in there Okay

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so the cash that year was volatile It was a

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hundred twenty five million to start But then i went

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down to twenty five million after the factory purchase than

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end up a year later with fifty million added to

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their coffers and gas profits from operation leaving them with

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seventy five million bucks in the bank got all that

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All right So here's where the difference hits between accounting

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profits perspective and a cash flow perspective on the notion

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of profit Simply put it isn't fair for the company

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Tohave a view that the one hundred million dollars factory

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as an expense should all hit the profits line all

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in one year as if they bore the burden of

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all that factory cost in one year and then showing

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it is being worthless in years Two three four and

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maybe beyond In fact the company doing proper accounting depreciates

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that factory in value to the tune of twenty million

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dollars a year for for four years until it will

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then sell it for scrap for twenty million bucks So

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that hit to the company in the first year should

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be twenty million dollars in value not one hundred million

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in cash That's an accounting change of assessing twenty million

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in expenses not one hundred million how's that work well

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the decline in value of that hundred million dollars takes

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five years And it looks like this But in your

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won the company loses one hundred million dollars in cash

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but gains a factory Confused Good Okay well let's zoom

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forward to your floor The company again made fifty million

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dollars in cash profits but it will show earnings of

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only thirty million Why Well because proper accounting using straight

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lined appreciation of that hundred million dollar factory properly shows

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the company depreciating it's value another twenty million dollars against

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its cash profitability So what A thirty percent tax rate

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company pays taxes on thirty million of profits or a

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tax bill of nine million bucks It's accounting earnings are

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actually twenty one million dollars but it will have produced

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cash or cash flow of fifty million dollars minus the

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nine million in taxes or forty one million in cash

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profits I either Cash flow is almost double the reported

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accounting profits Now with all that profit our company can

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finally start mass producing kitty copters Yeah yeah we're naming 00:03:55.308 --> [endTime] this cat todd

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