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Wednesday, June 26, 2024

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Profit or cash flow?

When it comes to publicizing financial reports, all eyes will be on the profitability of listed businesses. However, those who understand more about corporate finance often agree with each other that “profit is an opinion, cash is a fact,” implying that caution must be exercised with reported profit/loss figures because one thing – profit – is subjective, while the other thing – cash flow – is objective. Profit is a subjective figure We all know that profit is the difference between revenue and cost, but understanding where revenue and expenses come from is not a simple matter for many people. First of all, it concerns how revenue is recorded. There are periods when revenues are recorded but the company’s responsibility has only been partially fulfilled, such as revenues advanced by partners. These revenues make the profit picture look brighter, but in reality, they are liabilities on the balance sheet. Next is the nature of revenue, i.e. whether it is genuine or not. There are revenues that are actually virtual, arranged with ghost companies (non-existent companies), or artificial revenues with related parties, or revenues obtained by using tricks to make customers buy more than necessary. These bogus revenues distort profitability. In […]
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