Page 154 - (DK) The Business Book

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CASH IS KING

PROFIT VERSUS CASH FLOW

or new businesses, fast- practice it can lead to a huge
IN CONTEXT growing companies, and in cash shortfall. For example, if a
F times of recession, cash is construction business links its
FOCUS
king. In other words, profit takes a costs to the time when the finished
Financial management
back seat, while cash flow becomes houses are ready for purchase,
KEY DATES the critical factor. In accounting, it has ignored the huge cash
1957 John Meyer and Ed Kuh profit is an abstract concept based outflows that are incurred during
publish “The Investment on matching costs to the revenues the building process, and might
Decision,” the first study to generated within a period of run out of cash before the houses
look at cash flow and trading. This sounds fine, but in are sold. When times are good, a
investment in businesses.
1987 The US Financial
Accounting Standard Board
(FASB) introduces a new
In times of economic Companies with weak
requirement: companies must stability companies focus cash flow operate by
now complete an annual on profit; credit is cheap using supplier credit
“statement of cash flows” in and readily available. and overdrafts.
addition to a balance sheet,
income statement, and
retained earnings statement.

2013 The UK’s Co-operative
Bank abandons its plans to
purchase 632 branches of But in times of recession, relying
Lloyds Bank, because it has on credit is dangerous.
insufficient cash to buy the
business and run the branches.

Cash is king.