Cash And Profit Importance

2 Importance of Cash and Profit

Profits enables producers assess their success in a business venture. The motive of every business is to earn profit. Profit is the reward gained for taking risk in a business; it is the return on investment. Profit help businesses generate employment; it induces more investment and innovation and the expansion in business will result in the need for more employment. Profits are also, vital for business survival; a business will not grow and survive without making profit, therefore, profit is essential for continuous operation, motivation of staff, attraction of investors, and it builds confidence in the business. Additionally, profits serve as a yardstick for measuring the efficiency of a business. Further,

There was no formalised planning and control system to monitor cash flow.

4 Causes of Cash Flow Problem

Cash flow problems arises when it becomes difficult for a business to settle its debts in due time. Constant negative cash flow by the business can result in cash problem. The most typical reasons are; when a business is experiencing low profit or losses, making too much capital expenditure, creating too much investment in securities, too much increase in trade debtors, and decreased sales due to unexpected internal and external changes.

Low profits or losses happen when a business is spending more than it earns. The lack of profitability may be due to too much overheads, poor business model, lack of staff expertise, and lack of accurate financial statements. For instance, the sale price of a product is $100.00 and total cost of sales is $102.00; a loss of $2.00 is incurred. When this continuous, the business will accumulate more debt by borrowing to sustain its operations and this would result in cash flow problems, and eventually, lead to the collapse of the

The ability of a business to generate a good cash flow is essential for continuous operations. A business without cash would not grow and would soon collapse. This is because, suppliers may reluctant to supply more goods on credit due to late payment or non-payment of invoice, bank may be unwilling to extend credits and allow direct debits, because of defaults in repayments, the business would obtain bad credit rating, there would be delays in delivering customers’ orders, the business would be unable to pay employees, taxes, and bills, the business could face legal actions for non-payment of debts, and loose its reputation. furthermore, the business would loose discount on early payments, would be forced to accept higher prices from suppliers, and higher rates from