Is it possible to have made a profit and have no cash - Essay Example

Is It Possible To Have Made A Profit And Have No Cash? Profitability and cash flow are two independent but important concepts in any business entity.It is actually possible to have made a profit and have no cash. For the purposes of explaining the above statement, it is important to define the two terms, cash and profit. Profit refers to the revenue or gains obtained after all the costs of operating a business are considered. The profit may not be in monetary value since the same could have gone into increasing operating capital, payment of loans among others.

Profit could also be in the hands of debtors, undelivered supplies or trapped within other business operations. On the other hand, cash refers to liquid money that acts as the operating capital of the business. Cash flow simply refers to the ability of the business to meet present financial obligations. Based on the above definitions, it is possible for a business to have made a profit and have no cash. The business can make profits but the profit is trapped within business operations such as undelivered supplies, loan payments, uncollected revenue, or increase of working capital.

Additionally, the business could be failing in planning on collection of cash and making payments. The problem of lack of cash where profits have been made can be solved using several business operational strategies. The first solution is prompt billing whereby all cash that is owed to the business is collected promptly. It is also important for the business to make courteous follow up on both short-term and long-term debtors. It is advisable for the business to offer discounts for prompt payments to encourage prompt payments (OBerry 25-33).

It will also help a lot if all checks are deposited promptly and regularly. More importantly, payments such as dividends should be paid once the business has a good and stable cash flow (OBerry 25-33). Another important strategy is efficient management of payables. Suppliers play a key role in success of any business. Since suppliers take much of the running capital, it becomes necessary to adopt an efficient strategy of dealing with suppliers. Lack of cash can be managed by retaining funds as long as possible.

It is worthwhile taking advantage of creditor’s payment terms. For instance, if payment should be done within a month it is not advisable to pay on the first day. More importantly, electronic funds transfers should always be used whenever possible since quick money transfer can be done when deadline for payment is quite close (OBerry 25-33). However, the most important strategy is proper planning. An accurate forecast of possible expenses and income will make it possible to predict the financial status of the business at a future date.

This assists in timing of payments, investments, borrowing and other business operations so that cash flow remains stable throughout. Proper use of cash flow statements is essential in determining source of cash for business operations and possible expenditure. Proper management of cash flow statements provides an important tool of assessing influx and out flow of cash within a given time. This way, it will be possible to maintain cash, operate the business efficiently, and make profits at the same time (OBerry 25-33).

Works Cited OBerry, Denise. “Small Business Cash Flow: Strategies for Making Your Business a Financial Success.” New York: John Wiley & Sons, 2010. Print.