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Finance allah shmoop what is cash flow versus earnings Okay

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you think profits or profits right Well not unless you

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spell it P r o p h e t s

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Ask a gandhi or jeff bezos about that All right

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Well in the land of accounting there are aptly named

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accounting profits and there are also cash profits and the

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two of them are often very different Accounting laws skew

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things when it comes to assessing riel cash profits Here's

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out the ceo and founder of give a dog a

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drone A company that specializes in engineering remote control toys

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for your pets built a drone stamping factory for one

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hundred million dollars knowing that it will be worth twenty

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million dollars in scrap value in just four years Well

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he'll sell at that point and possibly upgrade if demand

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for puppy and kitty tech is still high will drone

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sales or steady producing cash profits of fifty million bucks

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a year each year into the foreseeable future but stated

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earnings and cash flows here are very different In the

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first year when the factory was built the company lost

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big cash money because it had to write one hundred

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Million dollar check to the builder of the factory Yes

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it made fifty million in profits but that year it

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lost fifty million dollars in cash Luckily it had no

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debt and it had one hundred twenty five million dollars

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in the bank Well that bank account went down to

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just twenty five million when they wrote one hundred million

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dollar check But it gradually filled back up to seventy

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five million by the time that year was done fifty

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million of profits and that fifty million in cash Yeah

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that that helps that floated right back in there Okay

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so the cash that year was volatile It was a

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hundred twenty five million to start But then i went

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down to twenty five million after the factory purchase than

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end up a year later with fifty million added to

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their coffers and gas profits from operation leaving them with

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seventy five million bucks in the bank got all that

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All right So here's where the difference hits between accounting

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profits perspective and a cash flow perspective on the notion

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of profit Simply put it isn't fair for the company

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Tohave a view that the one hundred million dollars factory

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as an expense should all hit the profits line all

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in one year as if they bore the burden of

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all that factory cost in one year and then showing

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it is being worthless in years Two three four and

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maybe beyond In fact the company doing proper accounting depreciates

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that factory in value to the tune of twenty million

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dollars a year for for four years until it will

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then sell it for scrap for twenty million bucks So

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that hit to the company in the first year should

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be twenty million dollars in value not one hundred million

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in cash That's an accounting change of assessing twenty million

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in expenses not one hundred million how's that work well

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the decline in value of that hundred million dollars takes

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five years And it looks like this But in your

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won the company loses one hundred million dollars in cash

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but gains a factory Confused Good Okay well let's zoom

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forward to your floor The company again made fifty million

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dollars in cash profits but it will show earnings of

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only thirty million Why Well because proper accounting using straight

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lined appreciation of that hundred million dollar factory properly shows

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the company depreciating it's value another twenty million dollars against

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its cash profitability So what A thirty percent tax rate

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company pays taxes on thirty million of profits or a

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tax bill of nine million bucks It's accounting earnings are

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actually twenty one million dollars but it will have produced

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cash or cash flow of fifty million dollars minus the

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nine million in taxes or forty one million in cash

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profits I either Cash flow is almost double the reported

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accounting profits Now with all that profit our company can

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finally start mass producing kitty copters Yeah yeah we're naming 00:03:55.308 --> [endTime] this cat todd

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