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Why cash is important – and not the same as profit

Why cash is important and not the same as profit? Watch this video to learn more.

As we’ve just seen, you can sell a product on account and send out an invoice and you’ll get the money from that eventually. But in the meantime, staff, suppliers and other expenses all need paying. And they often need paying using cash – cash that, potentially, the business doesn’t yet have. So it’s important that an organisation has enough cash available to meet these expenses as and when they fall due – otherwise they could have a problem.

So as the Kaplan tutor explains in the video, cash is extremely important for businesses – which means the cash budget is, too.

The difference between cash and profit can be summarised like this:

  • profit = revenue − costs incurred during the period
  • cash = the opening bank balance + cash receipts − cash payments during the budget period

A key point to achieve balance: organisations need to make sure that they don’t run out of cash, but at the same time having too much cash unused means that the organisation isn’t making full use of its assets.

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Budgeting: How to Prepare a Cash and Functional Budget

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