Suneet Singal on cash flow and profit

Suneet Singal’s published background includes corporate finance, which makes the difference between profit and cash a subject worth stating in ordinary words. Profit, in the Securities and Exchange Commission’s beginner’s guide, is what an income statement arrives at over a period after revenues and expenses. Cash flow is the movement of cash over a period, reported in operating, investing, and financing sections. A company can show a profit and still use cash. A company can take in cash and still show a loss. This entry shows how to read the two statements as answers to two questions, and how to keep a profit figure from standing in for cash. Any dollar example below is hypothetical and is not a result of a company named on this site. The career page’s filings are not used as profit figures or as cash figures.

Two questions, two statements

The beginner’s guide puts the contrast in one place. An income statement reports revenues and the costs and expenses associated with earning them, usually for a year or a portion of a year, and its bottom line is net earnings or losses for that period. A cash flow statement reports inflows and outflows of cash over a period. The guide’s point is practical: a profit figure tells you whether the accounting result was positive. The cash figure tells you whether cash increased or decreased. Readers who use one word for both will mis-state whichever document they are not looking at.

The period has to match before the comparison means anything. A quarterly profit and a full-year change in cash are not a pair. Two columns with the same start and end can be a pair. Write the period in the sentence, not in a heading the reader might skip. “Profit was positive” is unfinished. “Net income for the year ended on the date named in the income statement was the amount printed there” is a reading. You may then say, in a second sentence, what the cash flow statement showed for that same period. Two sentences keep the documents visible. One blended sentence hides which document lost the argument.

None of this is a reading of the Form 8-K filings on the career page. Those filings are historical officer disclosures: an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017, and a chief executive officer departure at FC Global Realty Incorporated effective 2 January 2018. They are not income statements and they are not cash flow statements. This entry does not pull profit or cash out of them. When it needs numbers, it labels them hypothetical.

What the income statement is doing

The guide suggests reading the income statement as a set of stairs. At the top is revenue from sales of products or services, often called gross revenue or sales. Returns and allowances come out. Costs of sales come out. What remains at that step is often called gross profit or gross margin. Operating expenses, including items such as administrative costs and depreciation, come out. Interest and taxes are dealt with on the way to the bottom line, net income or net loss. The stairs are why “profit” is an ambiguous word. Gross profit, operating income, and net income are different steps. A sentence that says profit should say which step.

Depreciation is the step that most often separates profit from cash. The guide describes depreciation as spreading the cost of a long-lived asset, such as machinery, over the periods that use it. The accounting expense in this period is not the same event as writing a check for the whole machine in this period. The check, if it is written this period, belongs in the cash story. The fraction of cost assigned to this period belongs in the profit story. Both can be faithful to their own rules. They are not required to match. A reader who adds depreciation back in their head has started a different calculation. That calculation needs to be labeled as the reader’s calculation, not as net income.

Earnings per share, which the guide describes as net income divided by outstanding shares, is still an income-statement figure. It does not become cash per share merely because it is expressed per share. The guide notes that companies almost never distribute all of their earnings. A per-share figure is not a dividend, and a dividend is not the whole of cash flow. If your sentence is about cash the shareholder received, you need the distribution the company actually declared or paid, and the document that says so. If your sentence is about the accounting result, stay on the stair you named.

What the cash flow statement is doing

The guide divides the cash flow statement into three parts. Operating activities begin from net income or loss and reconcile it to cash from operations, adjusting for non-cash items such as depreciation and for changes in operating assets and liabilities. Investing activities include purchases and sales of long-term assets and investment securities. Financing activities include cash from issuing stock or borrowing, and cash used to repay borrowings. The bottom of the statement is the net increase or decrease in cash for the period. A reader who quotes only the bottom has a useful fact and has missed the path. The path is the point of the three parts.

A purchase of equipment is the guide’s kind of investing outflow: cash leaves, and a long-term asset arrives on the balance sheet. Borrowing from a bank can be a financing inflow: cash arrives, and a liability arrives. Collecting from customers, paying suppliers, and paying employees sit, in ordinary cases, in the operating section. You do not need to re-perform the entire reconciliation to avoid the basic mistake. The basic mistake is calling the bottom line “profit,” or calling net income “cash from operations.” They have different captions. Use the caption that is printed above the number you cite.

The statement is a period statement, like the income statement, and unlike the balance sheet’s snapshot. The ending cash on the balance sheet should be intelligible beside the net change on the cash flow statement, because the change explains how cash moved from the prior snapshot to this one. If you cannot tie those together at a high level, you may be looking at different entities, different dates, or a condensed slide that dropped a line. Stop and match the headings. Do not force the tie with a number you calculated off-camera and then present as the company’s figure.

A hypothetical period, not a reported result

Consider a hypothetical company that is not an issuer named on this site. For a hypothetical year, its income statement shows net income of 50. Its cash flow statement shows a net decrease in cash of 10. Suppose the operating section shows cash from operations of 70, after adding back a depreciation expense of 30 and subtracting an increase in receivables. Suppose the investing section shows a 90 outflow for equipment, and the financing section shows a 10 inflow from borrowing. Then 70 minus 90 plus 10 equals a decrease of 10. The arithmetic is here to make the sections visible. It is not a disclosure. It is not a result for FC Global Realty Incorporated or First Capital Investment Corporation or any fund, program, or person.

Read the hypothetical the way you would read a real statement, and notice what you still do not know. You do not know whether the equipment was a sound purchase. You do not know whether the receivables will be collected. You do not know the officer’s name. You do know that a sentence such as “profit was 50, so cash improved” is false inside the hypothetical, because cash decreased. You also know that “cash decreased, so the company was unprofitable” is false inside the hypothetical, because net income was positive. The two sentences fail for the same reason. Each lets one statement veto the other without opening it.

Change one hypothetical lever and the moral people want to tell will change with it. Remove the equipment purchase and the cash story changes while net income may not, if the purchase is a balance-sheet asset rather than an immediate expense. That is ordinary accounting, and it is why the sections exist. When you leave the hypothetical, take the habit and leave the numbers. A real sentence needs a real document, a real period, and the caption of the line. The numbers in this section retire when the paragraph ends.

Why the notes and the period still matter

The guide’s section on footnotes is not optional color. Accounting policies tell you how revenue is recognized, how depreciation is charged, and how estimates are made. Two companies can both report net income and mean, in the detail, that they applied different policies to different facts. You can compare the captions only after you have noticed the policies that feed them. A cash flow statement likewise depends on how the company classifies items among the three sections. If a classification looks surprising, the note or the statement itself is the place to look, not a general essay. This essay can tell you what the three sections are for. It cannot classify a line you have not read.

Management’s discussion and analysis, as the guide describes it, is management’s narrative of condition, results, and known trends or uncertainties that are required to be discussed. It can help you see why receivables rose or why capital spending increased. It is still a narrative with a perspective. Read it after the statements, or beside them, not instead of them. If the narrative says cash was strong and the statement shows a decrease, believe that you have a question, not that one of the two pages automatically wins. The question is a reading task. It may be a definition, a period mismatch, or a use of “cash” that means cash from operations rather than the bottom of the statement.

Period mismatches are the quiet error. Trailing twelve months, a fiscal year, a quarter, and a stub period between two dates are different windows. A biography’s effective date, such as 2 January 2018 or 12 September 2017, is not a fiscal period at all. Do not align an officer’s effective date with a profit figure as if the date explained the figure. The career page dates roles. Financial statements date periods. Putting them in one sentence requires two sources and a verb that does not pretend one caused the other. This reference does not offer that causal sentence, because the officer filings used here do not state results.

How the words get substituted, and how to stop it

Substitution happens in predictable phrases. “They made a million” can mean revenue, gross profit, net income, or cash, and in conversation it often means whichever of those would make the speaker’s point. In a written note, the phrase is too loose to keep. Replace it with the caption and the period, or delete it. “Cash profit” is another phrase to retire unless you have defined it on the page and shown the arithmetic. It sounds like a bridge between the two statements. It is usually a way of skipping both.

EBITDA, which has its own entry here, is a frequent substitute and a poor one for cash. Adding back interest, taxes, depreciation, and amortization does not reconstruct the cash flow statement. Receivables, inventory, payables, capital expenditures, and debt principal can still move cash without being the items in that acronym. If a document presents a non-standard profit measure, look for the reconciliation to the comparable figure prepared under the accounting rules, and read what was added or removed. If there is no reconciliation in the document you have, do not invent one. Cite net income as net income, or cite the cash flow line as the cash flow line.

A last check is grammatical. Give profit and cash different verbs in your notes if you must mention both. Profit was the net income figure for the period. Cash increased or decreased by the amount at the bottom of the cash flow statement, or cash from operations was the operating subtotal. The verbs “was” and “increased” are harder to confuse than a single verb “generated,” which people apply to either. Small grammatical habits are part of reading. They keep a later paragraph from laundering one number into the other while you are looking at a third topic, such as a title or a program.

Where this sits beside the rest of the record

Use the income statement when the question is the accounting result for a period. Use the cash flow statement when the question is cash. Use the balance sheet when the question is the position at a date, including the cash balance at that date. Use a Form 8-K when the question is a reported event such as an officer change. The company-record guide is for the event. This entry is for the two period statements. The beginner’s guide from the Commission is the public walk-through of how the statements relate. None of these pages is legal advice or a personal financial recommendation, and none of them is a result for a named person.

Suneet Singal’s site can discuss corporate finance as a field without turning the field into a personal track record of profits or cash. A field is a kind of work. A statement is a document. A hypothetical is a teaching device. Keep the three in different sentences and the page stays honest. If you are about to attach a number to his name, ask which document printed the number. If the answer is this essay’s hypothetical, the number does not attach. If the answer is an officer Form 8-K, look again, because the facts used from those reports are dates and roles, not a profit figure and not a cash figure.

What this entry does not claim

Suneet Singal’s published professional background is in real estate and corporate finance. Company filings linked from this site record a chief executive officer departure from FC Global Realty Incorporated effective 2 January 2018 and an acting chief executive officer appointment at First Capital Investment Corporation effective 12 September 2017. The Suneet Singal Scholarship, Grant and Giving websites describe him as the founder of those programs. This entry explains a general subject. It is not a private track record, a current job title, an investment result, or a quote.

Continue with what a balance sheet is for and what EBITDA leaves out. Role dates, not profit figures, are on the career page. This is a reading guide, not legal or financial advice.