Understanding the Difference Between Profit and Cash Flow

Hi there fellow business owners,

Today, I’m sharing a quick video on the importance of understanding the difference between profit and cash flow in your business. These insights come from a recent webinar I hosted—let’s dive in.

Turnover is Vanity, Profit is Sanity, and Cash Flow is Reality

One of my favorite sayings in business is, “Turnover is vanity, profit is sanity, and cash flow is reality.” It’s very common for business owners to feel frustrated when their bank account doesn’t reflect their profits. That’s why it’s crucial to understand the difference between profit and cash, and why a high profit doesn’t always translate to more cash in the bank.

Maximizing Cash Gains

To improve your cash flow, consider these strategies:

• Faster Debtor Collection: Shorten the time it takes to collect payments from customers.
• Decrease Inventory Days: Reduce the time stock sits unsold.
• Negotiate Payment Terms: Extend payment terms with suppliers to hold onto cash longer.
• Tax Management: Efficiently manage your tax obligations

Cash Flow: The Lifeblood of Your Business

A profitable business can still go out of business if it’s starved of cash. On the flip side, a business running at a loss can survive if it has access to funds from investors or financiers. In other words, cash flow is the reality every business must face.

Practical Examples: Understanding the Difference

Here are a few examples to illustrate the difference between profit and cash:

• GST: GST affects your cash balance but not your profit.
• Loan Repayments: Loan repayments impact your cash balance but not your profit.
• Interest on Loans: Interest on loans affects both your profit and your cash balance.
• Asset Purchases: Asset purchases only affect your cash balance.
• Asset Sales: Asset sales also only affect your cash balance.
• Depreciation: Depreciation only affects your profit.

As you can see, even if your business achieves a healthy profit, you may find little cash left in the bank after paying tax, making loan repayments, and purchasing new assets.

Watch the video here where I talk about the Cashflow VS. Profit in Business 

Mick

I’d love to help you achieve your business dreams, please don’t hesitate to contact me;
07 5646 4050
mick@ignitionaccountants.com

 

Book a call  for a complimentary Proactive Accounting Meeting to discuss your accounting profitability