Under what circumstances would Cash Flow be smaller than profits?

Question

I'm looking at an ususual (to me) financial statement, where cash flow is dramatically less than profits. In what circumstances could this be true? I'd always seen cash flow as exceeding profits, because profits subtract out non-cash charges (eg depreciation and amortization). I don't think I've ever seen profits exceed cash flow though-- does this ever happen? When?

Answer 1

Happens all the time.

Here's when:

1) Non-cash items. The income statement works on the ACCRUAL basis (accounting for things that have a "cost", even when there is no cash outlay). Think of operating cash flows as a reconciliation between accrual basis and cash basis. In the operating cas flows, you take the net profits and reconcile things that are non-cash. Depreciation and amortization are two good examples. These are things that you are "adding back". However, it is not always "adding". You can subtract too. You also reconcile changes in working capital. For example, when you "sell" something, it either comes in as cash or is still a receivable outstanding. This means that if receivables rise by $1,000, it is a revenue that you haven't received in cash this financial period.

2) Balance sheet items. Not all things happen on the income statement. Let's say you borrow $10,000 from a friend for no interest for two years. You notes payables goes up $10,000 and your cash goes up $10,000 but there is no change in the income statement. Of course, this is if you are asking about "total cash flows" instead of just operating cash flows.

3) Non-operating items. I am not sure, but I think you are saying that you've never seen OPERATING cash flows be less than profits. Remember, not every income statement "add back" is in operating profits. For example, interest expense or profits from an investment sale would not be included in operating income.

I hope that helps.

Answer 2

Any and all expense items in the P/L that are large relative to revenue. This could be one of many reasons. Strong competition for goods and services, wrong pricing, strong competition for the main cost items e.g. labour, money (high interest environment) material (consumables). This of course depends on the business and macro economic issues as well as on the ability of the entrepreneur. Bean counters with no imagination need not apply.

Answer 3

I'm frankly stumped - been thinking about this for a bit... and outside of someone cooking the books... it seems impossible for profit to actually exceed cash flow...

-dh

Answer 4

Use Business Plan Pro software for your planning needs. It can balance your numbers across the board, and alert you when something doesn't add up. You can purchase it online, or any place pc programs are sold. It's not that difficult to use, costs under $100, and can save you a lot of time and headaches.

Answer 5

One way would be if your debt service (principal payments on loans, etc.) would be high since net cash flow is after debt service. Another way would be if you are on an accrual basis and had a lot of accrued expenses paid in the following year.

Answer 6

impossible, call the FTC or get a lawyer or something