good cash flow. A business manager cannot fully manage profit without also managing the assets and liabilities of sales revenue and expenses. In our business example, the changes in these assets and liabilities cause cash flow to be higher than the profit for the year. In other situations, the changes can cause cash flow from profit to be lower—perhaps much lower—than profit for the period (and can cause negative cash flow in extreme situations).
Business managers use their income statements to evaluate profit performance and to ask a raft of profit-oriented questions. Did sales revenue meet the goals and objectives for the period? Why did sales revenue increase compared with last period? Which expenses increased more or less than they should have? And there are many more such questions. These profit analysis questions are absolutely essential. But the manager can’t stop at the end of these questions.
Beyond profit analysis, business managers should move on to financial condition analysis and cash flows analysis. In large business corporations, the responsibility for financial condition and cash flow is separated from profit responsibility. The chief financial officer (CFO) of the company is responsible for financial condition and cash flow. The chief executive officer (CEO) and board of directors oversee the CFO. They need to see the big picture, which includes all three financial aspects of the business—profit, financial condition, and cash flow.
In smaller businesses the president or the owner/manager is directly involved in controlling financial condition and cash flow. There’s no one to delegate these responsibilities to, although, consultants and advisors can be hired for advice.
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