Do you prefer a company that had losses for the past few months, but could pay all its suppliers or do you prefer a company that had profit, but faced difficulties to pay its suppliers?
Normally we think a profitable company is better because it is generating products or services, selling them and the result of all income less all expenses is positive. On the other hand, if a company is presenting losses means that it is not capable to sell enough products and services to meet all its expenses.
However, it is not like that it is work.
Let's think about the two scenarios:
Scenario 1 - Company showing losses but paying its suppliers:
T-shirts Pty sells personalized t-shirts. The company buys raw material (white t-shirt), draw on the computer some cool designs and send both, the white t-shirts and the cool design, to Silk Pty that is going to produce those t-shirts.
T-shirts Pty receives the sells in 10 days and pays Silk Pty after 20 days, so the cash flow is something like that:
T-shirts Pty is smart because it is cash flow is playing within its objectives. You can see in the graph that there is $ 12,000 of administrative expenses and $ 13,000 of tax. Adding all revenues and expenses we find:
The Profit/ Loss is :
The Cash Flow accumulated shows the company did not face difficulty in paying its debts during December, even though it showed a loss in this month.
Scenario 2: Company showing a profit but not paying its suppliers.
You can see the company has a great profit:
However, the cash flow accumulated is not that good:
In conclusion, I would rather own a company that is making losses but has a great cash flow, which makes the company pay suppliers and employees on due dates instead own a company that is making a great amount of profit ut is facing difficulties to pay its debts.
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