Page 273 - Cambridge IGCSE Business Studies

21: Income statements

The difference between profit and cash
In Chapter 19 we looked at the importance of cash to a business and in this chapter we
have looked at the importance of profit. Many new businesses make a profit, but they

do not survive very long because they do not manage their cash well. Businesses oft en

fail because their owners do not understand the difference between cash and profi t.
Some of these differences between cash and profi t include:

■ money invested in a business, or borrowed by a business, increases cash but does
not increase profit
■ capital expenditure, such as buying a new machine, decreases cash but does not
decrease profit
■ sales of goods on credit are recorded in the income statement as soon as the goods
have been sold. This increases profit but cash does not increase until the buyer pays
for the goods.
It is important for owners and managers to remember that cash pays the day-to-day

expenses, not profit. Cash is important for the business at all times. Profi t becomes
more important for the long-term success of the business.

CASE STUDY Jimmy Lie

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Bicycles in Indonesia

Jimmy Lie, a young Indonesian entrepreneur, opened a number of upmarket stores selling branded bicycles. He
recognised a growing trend for such bicycles among young, affl uent, Indonesians.
He used his own savings and obtained investment from family members to purchase stock, rent suitable premises
and advertise his business. He paid premises rent in advance, even before he started to sell his bicycles. His shops have
made good profits right from the start and he has been able to reward his investors with good dividends. Jimmy has

also retained some of his profi ts.
Jimmy has taken advantage of the new expensive tastes of his consumers and is opening another branch in the city.
Source: Adapted from www.bbc.co.uk/news/business-15809355

TASK
a What is meant by ‘entrepreneur’?
b How has Jimmy Lie made a profit?
c Identify and explain two reasons why profit has been important to Jimmy Lie’s business.
d Using the case study explain why profit is not the same as cash.