5.1.1 Cash vs Profit & Expenditure
The Bankruptcy Trap: Why Profitable Companies Fail
💰 PROFIT
Revenue - Expenses
Recorded when the sale is MADE, even if not paid
Based on Accrual Accounting: transactions recorded when they occur, not when cash changes hands
💵 CASH
Money in the Bank
Recorded when money ARRIVES in your account
The actual liquid funds available to pay bills and salaries
⚠️ THE BANKRUPTCY TRAP
You sell $1,000,000 worth of goods on credit.
Profit = $1,000,000 ✓
Sale recorded on income statement
Cash = $0 ✗
No money received yet
Result: You can go BANKRUPT while being PROFITABLE (Insolvency)
🎮 The Bankruptcy Trap Simulator
Experience how a profitable company can run out of cash and face insolvency
📊 Capital vs Revenue Expenditure Sorter
💎 Capital Expenditure (CapEx)
Spending on long-term assets
- • Machines, Buildings, Equipment
- • Provides benefit for multiple years
- • Appears on Balance Sheet as assets
- • Depreciated over time
⚡ Revenue Expenditure (RevEx)
Spending on day-to-day costs
- • Wages, Rent, Utilities, Supplies
- • Consumed within one year
- • Appears on Income Statement as expenses
- • Reduces profit immediately
🚀 Why Startups Fail
PRIMARY REASON: Lack of Cash Flow
NOT: Lack of Profit
The Death Spiral:
- 1. Win large contracts (high profit)
- 2. Offer 60-90 day payment terms
- 3. Pay suppliers immediately
- 4. Pay salaries monthly
- 5. Run out of cash before payment arrives
- 6. Cannot pay bills → Insolvency
The Solution:
- ✓ Cash Flow Forecasting
- ✓ Tight Credit Control
- ✓ Working Capital Management
- ✓ Overdraft Facilities
- ✓ Factor Debts (Sell Receivables)
- ✓ Demand Deposits/Advance Payment
💡 Business Wisdom:
"Turnover is vanity, profit is sanity, but cash is REALITY."
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