Sources of Cash

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on March 02, 2023

In a given period, any of the following activities will generate cash:

  • Increase in share capital during the year
  • Decrease in any asset during the year

Net Profit as a Source of Cash

Net profit is obviously the most apparent source of cash in any period.

To prepare a cash flow statement for a company, the starting point is net profit as disclosed by the profit and loss account (i.e., the profit before deducting any corporation tax for the year, any dividends for the year, or transfers to any reserves).

The reason for considering profit before tax and dividends is obvious: namely, taxes and dividends are paid after the end of the financial year and, hence, do not form part of the cash outflows for the year.

However, all profit is not earned in the form of cash.

Therefore, the net profit figure disclosed by the profit and loss account needs to be adjusted in some respects to arrive at the amount of cash generated through normal trading or operational activities.

These adjustments account for non-cash expenses and non-cash incomes, as well as items that do not fall within the definition of the company's normal operational activities.

Sources of Cash FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.