We don’t mean to alarm you right here in the first sentence, but if you don’t know the difference between cashflow and profit, the consequences for your business could be disastrous!
As a business owner, it’s vital that you’re clued up on the real-world impact of day-to-day financial terminology. Now, no-one’s asking you to crunch numbers and file returns (you can leave that to us), but potentially game-changing business decisions should at least be backed by an understanding of the numbers in front of you.
For example, imagine you’re about to purchase a new piece of equipment for your business. If you confuse profit for cashflow, you could find yourself in a rather sticky situation further down the line when suppliers come knocking and you’re unable to pay.
That’s why we wanted to clear up this matter once and for all and explain the difference between cashflow and profit so that you can run your business in a responsible and effective manner.
So, what is the difference?
- Understanding Cashflow
Cashflow is precisely what it sounds like – the flow of money into and out of your business. Cash is king when it comes to funding day-to-day operations, paying taxes, buying inventory, and paying employee salaries and benefits.
- Understanding Profit
Profit – sometimes called ‘net income’ – is what’s left after you deduct your business expenses from your revenue. It gives you and your company’s stakeholders an indication of the current performance of the business, and it’s also used to calculate your tax bill.
Which is more important?
As is often the case when trying to rank the importance of business terms, the answer to that particular question is: It depends.
For some companies, it’s possible they’ll generate a profit every month, but cash is tied up elsewhere in the business. Without cash to hand, the business could run into a difficult situation when the time comes to pay employees or settle debts. In this instance, positive cashflow is more important than profit, as without access to cash the company could be forced into bankruptcy.
On the other hand, not generating a profit can have an adverse effect on cashflow. If revenue is flowing into the business, and almost immediately flowing back out to cover existing debt, big changes need to happen. By focusing on profit over cashflow, and returning the company to a profitable state via a reduction of overheads and renegotiating terms with suppliers, you can retain more cash to keep the business running.
Don’t worry, we’ll keep you right…
Profit and cashflow are both very important to the short and long-term success of your business. That’s why they both make up part of our Super 6 services. We can help you Improve Cashflow and Increase Profitability.
Contact us today to speak with one of our friendly advisors to get started.