Question

A restaurant in the Cash Flow year 1 shows that the operation is projected to lose -46,892 over the year. In other words, based on projections, there will be a deficit in the bank accounts of -46,892.  What are some of possible solutions?  In year one is showing a positive P&L for the year. Why is there a difference? How can one see a positive P&L yet not have cash in the bank?

Answer 1

Here the restaurant is having a negative cash flow which means the restaurant will have deficit in the bank accounts.

Some of the possible solutions are -

a) Modify the payment terms: There will high sales for a firm but negative cash flows can be due to customers not paying the firm. adjusting or modifying payment terms make money receive more quickly. Here as it is a restaurant, there is less chance of credit bills to customers. But if there is sales on credit, discounts can be given for faster payments.

b) Reduce expense: Another reason to have negative cash flow is to have many costs. Efforts must be made to reduce the operating expense as well as overhead expense.

c) Increase Sales : Increase sales by different low cost promotional methods like social media. Determine some effective pricing strategy to attract more customers.

There are times where there is a positive profit and Loss and negative cash flow. Reasons for such a difference is due to -

a) Accrual system : As per accrual concept, Net income as per profit and loss account is not measured by cash receipts and cash payouts. Companies may make credit sales and receive no cash payments from customers at the time, but still record revenues in computing net income. Under such a situation, the company would have a positive net income, but a negative cash flow for the year.

b) Asset Increase: Cash paid to increase certain operating assets for the year, such as inventory purchase, is a form of cash outflow could reduce total cash flow to be negative. Companies may also prepay certain expenses for the future that are recorded as incurred expenses only over time as per profit and loss account.

c) Reduction in liability : Payables are the results of accrued expenses from earlier periods that have not been paid in cash. At the time of the expense incurrence, net income was reduced, while cash flow was not affected.

d) Cash flow on non operating activities : Non operating expense for purchase of assets doesnot effect the profit and loss account directly. It is only affected through depreciation. But once cash is paid for such assets, it get affected overall cash flow and result in negative cash flow.

There are chances of having positive P&L yet not have cash in Bank. This is due to-

a) Customers not paying: This is one of the important reason why there is no cash in bank. Sales recorded on accrual will help in giving positive P&L but it will not bring cash to bank unless it is realised from customers.

b) Prepaid expense : Prepaid expense are recorded as assets in books and will not affect P&L but at the same time, it will reduce bank account balance.

c) Purchases : Purchase of materials held as stock will not reduce the Profit but payment for such purchase will reduce bank balance.

d) Asset Purchase : Purchasing of assets will affect profit and loss account over the years only by depreciation. But it will reduce bank balance on payment towards asset purchase.