Profit & cash
(Earlier during the week, like most of you I had a long hectic day with back2back online meetings working from home. I decided to call it a day and came out of the room. As I was passing by the living room I overheard my mother talking to someone with excitement)
Mother: (on the phone with someone) that’s great to know your friends loved it. I will have more Mango pulp and jams ready in a week’s time. By the way, how are your children…
Me: (went to the kitchen to munch something but was not particular. So, I opened the fridge, just looked at whatever was there, then closed it.
Then opened the overhead kitchen cupboards, again just looked at whatever was there, then closed it. Then again opened the fridge and was looking at things, that is when I heard my mother calling me, “Chinmay, Chinmay”)
Me: What?
Mother: come here, I want to tell you something?
Me: is it important or urgent or both?
Mother: Just come here when I call you!
(I went to the living room)
Me: What?
Mother: Guess what I did in the last two days?
Me: bought more gold?
Mother: No, why should I buy gold now. It’s not a festive season.
Me: bought more sarees?
Mother: No, again why should I buy them as it’s not a festive season. Hmm… probably I should, as I do not have any new saree to wear if I have to attend a function after the lockdown.
Me: (in my mind, you already have so many) ok tell me what you did, I had a long day and I am tired!
Mother: (with a big smile on her face) I sold all the Mango pulp and mango jams that I made this week.
Me: How? I mean who bought it?
Mother: you think only you know how to use WhatsApp? Even I know how to use technology.
Me: Ok, my genius mother, tell me what you did?
Mother: I posted in my friend’s group about the Mango pulp and mango jam along with pictures. You said people tend to see images more than just words.
Me: (in my mind, you are such a good student) then?
Mother: You remember my friend Vijaya (name changed) who initially bought 10 Kgs of mangoes and then bought 25 Kgs later?
Me: Yes, the one who lives in that big apartment.
Mother: correct, she said her apartment neighbors loved our farm mangoes and wanted more. But we have sold all the mangoes, she said they might buy the mango jam and pulp.
Me: And?
Mother: I sent her the samples in a small box and bottle. After tasting it they bought all the 5 Kgs of Jam and 30 Ltrs of mango pulp.
Me: Cool!
Mother: Now, I will make more jam and pulp. And will start making more profit from our farm. Go and tell your father how much I work, and ask him to support me.
Me: Hmm… (gave a typical Indian head nod)
Mother: Last time you said, I only make sales but not profit. This time I am sure I have made a profit. Go get a calculator, notepad and a pen, I will tell you all the numbers and you do the calculation.
Me: oh… now am I your bookkeeper?
Mother: just get it, let us see how much profit I have made?
Me: (grabbed a paper and pen) ok, I am ready.
Mother: I used 40 Kgs of mangoes that cost Rs 4000
Then, you can take the cost of sugar to be Rs 450
Then, the cost of other ingredients Rs 750
The cost of disposable bottles and boxes are Rs 400
Then, hmm… that’s it I think.
Me: how about labor cost?
Mother: that, your father has to pay!
Me: Ma, let us at least attach some number to the kitchen-hand who helped you.
Mother: ok, take it as Rs 800.
Me: How about the cost of gas consumed?
Mother: How would I know? You are the engineer, go figure it out.
Me: Ma, then how am I supposed to do the calculation?
Mother: Take some approximate number as miscellaneous expenses.
Me: hmm… we are guesstimating here! Ok, at what price did you sell?
Mother: 500 grams of Mango jam for Rs 500, and Rs 300 for 1 ltr of Mango pulp.
(I did a simple guesstimate calculation)
Me: In this project, you have made a profit of approximately Rs 5,500. This of course does not include rent, your labor, depreciation on equipment used.
Mother: What’s depreciation?
Me: Don’t bother, let us not complicate it.
Mother: So, I made a profit of Rs 5,500 right?
Me: Kind off
Mother: Go and tell your father I made that profit in two days.
Me: Ma, you have made a profit, however, shall we take a look at the money in the bank from this project?
Mother: (reluctantly said) ok
Me: Total Sales Rs 14,000, Expenses were Rs 8,500 so the profit is Rs 5,500 according to our guesstimate calculation.
Mother: correct
Me: Rs 14,000 is yet to be paid by the customers, right?
Mother: yes.
Me: However, Rs 8,500 cash went out of your bank account, right?
Mother: yes.
Me: So, cash in the bank is negative Rs 8,500
Mother: but how? I made a profit!
Me: Profit is not cash!
They are two different things. Just because you have made a profit does not mean you will have the same amount of cash in the bank.
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If you are a business owner, I am sure you know that it is almost impossible to make a profit of Rs 10,00,000 and have Rs 10,00,000 cash in the bank at the same time but it is certainly possible for a business to be making a loss and have cash in the bank.
To understand this (difference between profit & cash) better watch this short 5mins video,
Remember, Sales is Vanity – Profit is Sanity – Cash is King!
If you want to understand ‘Depreciation’ in simple laymen term, then here’s a short 3 mins video,
#financeacademy #financialmanagement #profit #cash