Q.1 Explain the difference between Profits and Cash flow? (80 words)
Profit is the amount of net gains available after adjusting for cost of goods sold, expenses, depreciation, amortisation, interests and taxes in the given accounting period. Profit helps in determining the long term sustainability of a business.
Cash flow on the other hand is the net amount of transfers of cash and cash equivalents in and out of business entity. Cash flow is used by lenders and banks to asses how well your company is doing. A good cash flow also helps entity meet its current liabilities.
While profit is the goal – and an indicator of financial health – cash flow is the lifeblood of an organisation, keeping operations ticking over on a day-to-day basis.
Q.2 Explain net cash flow. (80 words)
Answer: The net cash flow of an organization represents the sum over a period of time of the total cash received (inflow) from sales and loans less the total amount of money spent (outflow) by the company over the same period. It is an important measure of a company’s ability to survive and grow.
Net Cash Flow = Net Cash Flow from Operating Activities + Net Cash Flow from Investing Activities + Net Cash Flow from Financing Activities