How Can A Company Profit, But Show No Cash?
Well, company can have a profit but not have cash because profit is computed using revenues and expenses, which are different from the company's cash receipts and cash disbursements. In other words, there is a difference between revenues and receipts. There is also a difference between expenses and expenditures.
Let's assume that a company "A" uses the accrual method of accounting. It provides $25,000 of services to its clients in its first month and the clients can pay in 30
days. The company will have $25,000 of revenues in its first month, but the cash will not be received until the second month. If the company's expenses are $14,000 in the first month, the company will report a profit of $11,000 but will not have received any cash from its clients.
Another example, company "B" may have a profit of $60,000 in its first year, but during its first year it uses $65,000 cash to acquire equipment that will be put into service at the beginning of the second year. Company "B" will have a profit, but will not have the cash.