A very simple formulation for revenues and profits would be:
profit = revenue - cost
revenue = price * sales
While this formulation is perfectly sensible in looking at the big picture, it is not always appropriate for addressing issues in financial performance. This is especially if we are interested in seeing the differences between income and cash flow since this formulation implicitly assumes that the two are the same.
In order to look more carefully at the determinants of cash flow it is necessary to give somewhat more attention to the process of making sales and collecting money. Just the stocks and flows might look something like:
Here production value is used to set up a billing process that must first generate a bill and later receive payment on that bill. The policy formulations for billing and cash receipts are simple. Each is paid out over a period of time proportional to Awaiting Billing and Accounts Receivable.
The equation billings is just:
billings = Awaiting Billing/billing processing time
and there is a similar equation for cash receipts.
