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Financial Basis of An Idea
The following simplified example illustrates the timing differences between profits and cash flows:
Cashflows relating to Month
:Month 1
Month 2
Month 3
Month 4
Sales ($000)
75
60
50
60
Receipts from sales ($000)
20
35
75
60
Payments to suppliers etc. ($000)
40
20
5
65
Net cash flow ($000)
(20)
15
70
(5)
Cumulative net cash flow ($000)
(20)
(5)
65
60
This shows that the cash from sales in Month 1 will not fully materialise until Month 3 and that a serious cash short-fall will be experienced during Month 1 when receipts from sales will total only $20,000 as compared with cash payments to suppliers of $40,000.
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