My issue with cash flow is inventory. Can you explain further on it? Let's assume my company made a note profit for the year 2024 for $100,000. Why should I deduct an inventory in my warehouse yet to be sold of $10,000 from my profit already made of $100,000? To get operating cash flow of $90,000. Why? Since I know I still have inventory of $10,000 in store to be sold in 2025 to generate more profits.
The inventory in your example is deducted because the company spent cash to buy it but has not yet sold it. Even though it will generate future revenue (2025), the cash was already used, reducing available cash today. Remember that there's a difference between profit (accounting-based earnings) and cash flow (actual cash movement going in and out). The $10,000 inventory will eventually be sold in 2025 and generate revenue then - but for now, it represents cash that’s unavailable for use. Hope that helps.
My issue with cash flow is inventory. Can you explain further on it? Let's assume my company made a note profit for the year 2024 for $100,000. Why should I deduct an inventory in my warehouse yet to be sold of $10,000 from my profit already made of $100,000? To get operating cash flow of $90,000. Why? Since I know I still have inventory of $10,000 in store to be sold in 2025 to generate more profits.
The inventory in your example is deducted because the company spent cash to buy it but has not yet sold it. Even though it will generate future revenue (2025), the cash was already used, reducing available cash today. Remember that there's a difference between profit (accounting-based earnings) and cash flow (actual cash movement going in and out). The $10,000 inventory will eventually be sold in 2025 and generate revenue then - but for now, it represents cash that’s unavailable for use. Hope that helps.
Thanks for the explanation. I understand fully now