This article talks about cash flow and the misunderstanding the difference between cash and profits. Profits can be generated either cash or on account. According to the Generally Accepted Accounting Principles revenues incurred at the moment of selling the products regardless cash or on account so the profit or loss statement shows us the net income of our operations but not cash on hand or in the banks. Accounting is a complete system which consists of four major financial statements which are:

Profit and loss statement
Balance sheet
Cash flow statement
Retained earnings statements
There is a very important issue here, the company that is generating high revenues is not necessary has cash on hand.

Every company must care a lot about its cash on hand, cash management is very important for the life of enterprises because the moment they fail to match cash requirements and obligations they may go bankrupt.

There are many tools that can help the financial managers to care about cash which is through financial ratios and proper financial budgeting. Liquidity ratio, acid test, working capital, quick ratio, aging receivables…all of these ratios can help the company to control its cash so that they can measure the time needed to convert non cash assets into cash money.

There are two types of Cash Flow statements one is called Direct Cash Flow and Indirect Cash Flow..The Indirect Cash flow statement is the wide spread cash flow that all finance people knows about it and put it in their periodical reports which is the Beginning cash plus or minus the movement of all balance sheet account positively or negatively from all activities such as operating activities , investing activities or financing activities but actually the management sometimes needs exactly to know the cash flow regardless of the direct cash flow because it may not be effective in the short term while it is effective on yearly basis.

The direct cash flow help the top management to take fast actions and shows them the exact short term cash position of the company and help them avoid surprise insolvency in the company which may lead to big problems to pay important company liabilities such as governmental obligations like taxes and Social Security in addition to bank dues and salaries.

Shortage in cash can lead to break the relationship with key suppliers who are important to have stable relationship with them in order to have a good bargaining power which can help the company to get the best supplies with the best prices but this need to build a stable relationship with the suppliers to avoid late payments and the loss of the advantage to get the company’s supplies at the best prices available in the market.

The Direct cash flow starts from the available cash and banks position and add to the available current cash the confirmed cash that will be generated from sales in the current month and add to it the collections from bills or postdated checks during the same period in addition to the aging of parables in order to identify the overdue during this period taking into consideration the bank commitments and payroll.