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What are the differences between profit and cash management?

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The formula for profits is: Net Income (profit) = Revenues - Expenses Cash is simply the balance in your bank account. At first blush it looks like net income and the change in cash should be the same but they can actually be quite different. For example: If widget company sells a contract of 3 million widgets to client who they are reasonably certain to be able to collect from they can either recognize revenue immediately on recognize revenue on this contract as expenses are incurred (depending on the accounting standards of the country where they operate). In this particular example they will not receive the cash until the contract is delivered thus profits would be higher than cash flow. Usually for a start-up company or a company which is expanding rapidly profits will exceed cash flow from operations (CFO), while a company which is contracting or scaling down operations will see higher CFO than net income. There are exceptions to this rule of course, but as a rule of thumb I ... more
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