27/05/2020
A company can be cash generating and making losses.
Another company can be profit making and having dire cash situation.
Here is why:
Profit = Revenue - Expenses
Where Expense > Revenue, you have a loss.
Understanding what is revenue and expense is not as straightforward as people (especially non-accountants) think.
Revenue is not simply the cash you collected from your sales as people think. Let me spare you the accounting jargon called “principles of recognition of revenue”, but present only one interesting aspect of what is recorded as revenue: once that sale transaction is completed and both buyers and sellers fulfill some conditions (eg buyer accepts delivery of the goods), the seller can record revenue in his books, even if their contract says he will be paid cash next year. You see something that is included in revenue today and not cash today. That’s scenario 1, which simply means credit sale is still a revenue despite no cash yet.
Scenario 2: you can actually have received the cash for a “sale” but you can’t record it as revenue yet. This is the case with someone paying you money well in advance for something you have not delivered or certain other contractual conditions have not been met. That is called deferred revenue - you can’t record it as part of your revenue. Rather, it is a Balance Sheet item, actually a liability to you (because you have collected money for an obligation you are yet to carry out). An example here is that advance money you pay to real estate developer. Even though he has the cash, that cash is not revenue to him yet until the house is delivered or some contractual milestones met.
In the first scenario, you can see why someone can have high revenue (and profit) despite not having the cash yet.
In the second scenario, you can see why someone can have big cash, but low revenue (hence loss yet).
Those first two scenarios are from revenue side of the profit/loss equation, let me paint two more scenarios from the expe
