If you’re a business owner, you know that cash flow is key to your success. But what exactly is cash flow? And how is profit different from cash flow? In this blog post, we’ll break down the difference between cash flow and profit, and tell you exactly why cash flow is confidence.
How do profit and cash flow differ?
To really understand the difference between generating profit and managing cash flow, we need to look at what both these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cash flow is an invaluable business skill.
Let’s take a look at the differences:
- What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It’s driven by creating a profit margin and generating value from your products and/or services.
- What is cash flow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, to pay suppliers, to cover wages or to buy raw materials etc.
Why is positive cash flow so important?
‘Cash flow is confidence!’ may be a cliche, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cash flow then the business may not survive as long as the end of the year.
What’s needed is good cash flow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.
A business can generate high revenues and big profits, but still, be cashflow poor. In other words, it can have profits at the end of the period but have very little liquid cash to fund it’s day-to-day operations over the course of the period.
How would you like to have more cash in the bank?
We can help improve your cash flow management and get you back in control of your finances. We’ll work with you to create a plan that helps you manage your income and expenses, so you can have more money in the bank. Book a call today for a free consultation!
If you’d like to learn more about strategies you can use to improve your cash flow, I suggest you check out this next article here.
Are you struggling to make your business work?
Insight CA Limited is a team of experienced Auckland-based chartered accountants and business advisors who can help. We’ll give you the power to see what’s really happening in your business, so you can take control and start making progress. Click here to learn more about how we can help you achieve your goals.