Yes, it is actually possible for a business to make profit and still have no cash. This situation may arise due to a number of reasons. Some of these reasons relates purely to the manner in which profit is calculated.

Reasons why a business may make profit and still have no cash

The manner in which profit is calculated

The calculation of business profits may create a situation where a profit is made but the business still suffers from cash flow problems. For example, there are some items that go into the calculation of business profits but which do not increase the cash position of the business. An example of this item is a decrease in provisions for doubtful debts. Such a decrease is normally treated as revenue. A gain from the revaluation of assets is also another item that affects the profit of a business without necessarily improving the cash position of the business.

In addition, the calculation of business profits may sometimes follow the accrual basis which makes it possible to record a profit but still have no cash. Under the accrual system, revenues are recorded when earned and not when the cash is received. Thus, the business will record rent revenues in respect to rental income even when the actual cash receipts has occurred. Another illustration of how an accrual basis of accounting may lead to profits without cash is the use of credit sales. Such sales are recorded as income for the particular period in which they are made even when the collections may take place at a later date.

Investment in capital assets

Even though a business may be making profits, it may still have no cash if much of that profit is used in the acquisition of capital assets. Capital assets are those long term assets used in the business for the generation of revenues. The use of these assets in the generation of revenues for the business extends beyond the particular period in which they are brought into the business. Unchecked investment into these assets may an otherwise profitable business into a cash strapped one. For example, a company that uses all the profits from a given year to finance an expansion program will still have made a profit but it will be facing a cash flow problem.

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