How it works
This is a simplified version of the indirect cash-flow statement. It starts with profit and adjusts for everything that moved cash without touching profit, or touched profit without moving cash.
- Cash from operations = profit + depreciation − increase in receivables − increase in inventory + increase in payables
- Change in cash = cash from operations − equipment bought − loan principal repaid − owner draws
Growing businesses often find that profit is fine but cash is tight, because growth ties cash up in receivables and inventory. That is a cash conversion cycle question, not a profitability one.
Why accrual books matter here
This bridge only works if the books are kept on an accrual basis with receivables and payables recorded properly. On a cash basis, profit and cash are blurred together. The cash vs accrual guide explains the difference.
Questions
Why is my profit higher than my cash?
Usually because customers owe you more than before, stock or work in progress has grown, you bought equipment, repaid loan principal, or took money out as draws or dividends. None of these reduce profit, but all of them reduce cash.
Are loan repayments an expense?
Only the interest is an expense. The principal portion reduces the loan balance, so it uses cash without reducing profit.
Is this the same as a cash-flow statement?
It follows the same logic as the indirect method, simplified to the items most owner-managed businesses have. A full statement prepared from reconciled books includes every balance sheet movement.
General information, not advice for your situation. Results are only as good as the numbers you enter.