Businesses must keep track of income and expenses on an ongoing basis in order to survive and grow within the marketplace. Within business accounting practices, cash flows and profits function within different areas of a company's financial record. When considering low cash flows versus lost profits, the effects of one may or may not determine the outcome of the other.
Financial statements provide a way for businesses to track cash flows and profits at different points throughout the year. In general, businesses manage accounting tasks through two main financial tools, known as the income statement and balance sheet. Businesses use income statements monthly or quarterly, whereas balance sheet use occurs once or twice a year. The income statement tracks income revenues and business expenses, while the balance sheet keeps track of a business' asset holdings and debt obligations. In effect, income statements provide an ongoing financial record of money made and money spent, while the balance sheet lists a business' existing assets and debt at different points in time. As such, information regarding cash flows and profits made or lost appears at different times within a company's accounting practices.
The revenue income generated by a business can come from product sales or payments for services rendered depending on how a company makes money. The monthly income statement subtracts a company's total expenses, such as product costs and employee wages, from total revenue income to come up with a net gain or net loss for the month. A period in which low cash flows occur ultimately affects the net income amount that appears on the income statement. And while any form of loss works against profit margins, profit losses that appear on a balance sheet result from other financial activities over a period of time. As a result, lost profits on a balance sheet may not coincide with low cash flows during a particular period.
A company's asset holdings appear in the form of cash revenue, monies owed to the company and physical assets, such as property, vehicles and equipment. As balance sheet records track asset holdings and liabilities, any net income gains or losses recorded on the income statement impact the assets listed on a balance sheet. Over time, profit losses or gains can affect a company's asset holdings. Other factors, such as loan interest rates, the duration of the loans, equipment depreciation and monies made (or lost) from any existing capital investments also have a bearing on a company's profit gains or losses. In effect, a business can show low cash flows within a period of time, but still generate profits depending on how other areas of the business perform within that time frame.
Cash vs. Profits
The way a company handles cash flows and profits may depend on its stage of growth and/or standing within its industry. For example, a company just starting out has different cash flow needs than a company that's well established within the marketplace. In order to gain momentum and stimulate growth, a start-up company may reinvest any profits made as a way to build capital. As a result, the company shows profit gains that far exceed the amount of cash they have on hand. A more mature or established company may have little need to reinvest profits made and carry little to no liability in terms of debt. As a result, the company shows minimal or even declining profit gains with large amounts of cash on hand. The combined effects of a business' income statement and balance sheet activities create this cash versus profits relationship as cash flows and asset holdings change over time.