Test your financial knowledge with the profit-cash game. You are given 10 situations. What is the impact on the company’s profit… and cash?
Profit or cash - first, a word of explanation
What’s the difference between profit and cash?
Many non-financials think there is no difference. Nothing could be further from the truth. Understanding the difference between profit and cash is one of the first things a beginner needs to master.
What is cash?
Cash refers to money in the bank, plus any other cash at the company. Cash held at companies is becoming increasingly irrelevant since, for most companies, most of their money passes through the bank.
What is profit?
Understanding cash is not difficult. No training is required. But really getting to the bottom of profit … that is quite another matter. Profit is an indication of health. Each year the accountant calculates whether sales were profitable or not. We end up with the following definition of profit:
Profit = Sales – Corresponding costs
Calculating profit is all about answering two questions:
- How much did we sell this year?
- Was this sufficient to cover all the costs needed to generate the sales?
This definition appears simple, but appearances can be deceptive. The profit-cash game will help you understand the real meaning of profit.
You are given 10 situations. It’s up to you to decide the impact on the company’s profit and cash.
To keep things simple, there’s no need to bother with VAT or other taxes.