Vinu: Manu, many businesses show profits but still face cash shortages. Why does this happen?

Manu: Because profit and cash flow are not the same, Vinu. Profit is an accounting outcome, while cash flow reflects actual money movement. Confusing the two leads to poor decisions.

Vinu: Can you explain this with a simple example?

Manu: Sure. Suppose a company reports a profit of ₹1 crore. However, if ₹70 lakh of sales are on credit and not collected, cash in hand may be insufficient to pay salaries or suppliers.

Vinu: So profit doesn’t guarantee liquidity?

Manu: Exactly. A business survives on cash, not profit. You can’t pay EMIs or GST with accounting profits.

Vinu: Where do finance professionals usually go wrong?

Manu: They rely only on the Profit & Loss Statement. The Cash Flow Statement, especially operating cash flow, tells the real story. If operating cash flow is consistently negative, the business is financially strained even if profits look healthy.

Vinu: What role do receivables and inventory play here?

Manu: A major role. If receivables increase from ₹2 crore to ₹4 crore or inventory piles up at ₹3 crore, cash gets blocked. Profit may rise, but cash availability falls.

Vinu: How should executives use this insight for decision-making?

Manu: Before approving expansion, dividends, or debt repayment, check cash flows. For instance, funding a ₹2 crore expansion with weak operating cash flow increases borrowing risk.

Vinu: Is positive cash flow always a good sign?

Manu: Not necessarily. Cash inflow from new loans or asset sales improves cash temporarily but doesn’t indicate operational strength. Only operating cash flow reflects sustainable performance

Vinu: Final takeaway for finance professionals?

Manu: Never equate profit with cash. Track both together. Profit shows performance; cash flow shows survival. Strong businesses manage both.

Vinu: That’s a distinction every finance professional must remember.

Manu: Absolutely. Clear understanding prevents costly financial mistakes.

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