Profit Vs Cash Flow
When you’re running your own business, you spend a lot of time chasing work, getting new clients, and invoicing people.
On paper you look very successful. But in reality, cash flow can be a problem and doesn’t always reflect the on-paper profits. You may even struggle to pay your own bills.
How is this possible?
This is the difference between cash flow and profit.
What is Cash Flow?
Cash flow is the basic movement of cash into and out of the business. It impacts how much money you actually have available at any given time.
It can be:
- Positive – when more money is coming in than out.
- Negative – when more money is going out than in.
Cash can flow into the business from client invoices, investments and from financing and it flows out with bills, materials, capital investments and daily business expenses.
During periods of negative cash flow, where more money is going out than coming in it may be necessary to bridge the gap with money from investments or even loans.
What is Profit?
Profit is the holy grail of every business; the cash that is left over once all the business outgoings have been paid.
This can be recorded as:
- Gross Profit – before the business costs are accounted for.
- Net Profit – after business costs including tax are paid.
- Operating Profit – excludes profit from outside the core business.
What a company does with profit varies. It can be:
- Paid to owners or shareholders as dividend payments.
- Reinvested back into the company (e.g. capital investment, R & D).
What is the Difference?
The key difference between cash flow and profit is that while profit indicates the amount of money that would be left over in a business after all the expenses have been paid, cash flow tells you how much money you have available to you to spend at any given point in time.
Profitable but Negative Cash Flow
Being profitable does not mean you automatically have adequate cash flow.
A common problem is that whilst on paper, when all invoices and expenses are taken into account the business shows a healthy net profit, the timings of payments in and out of the bank account means it can’t always pay it’s own bills wages or expenses.
At one point or another, most businesses have gone through a period where cash was flowing out faster than it was flowing in.
Common causes of such negative cash flow are:
- late payments on invoices issued.
- Poor timing of income and expenses.
It’s hard when a business is in a period of negative cash flow. It becomes impossible to re-invest in the business, and you spend all the time and energy trying to keep your head above water.
How to Manage Cash Flow
Whilst most business can handle negative cash flow for a short period, over any prolonged period of time it is detrimental to your business and the opportunities to grow.
However, there are some things you can do to try to avoid negative cash flow.
- Information is key.
Identify the cause of negative cash flow. Particularly poor payers, mismanagement of payment dates, investment in assets.
The more information you have the better.
- Clear payment terms and processes.
Ensure that in your Terms and Conditions you have very clear payment terms as well as penalties for non or late payment.
- Follow processes.
If you have very clear payment terms laid out in your Terms and Conditions, and internal credit control processes, then it is imperative you actually follow through.
- Streamline costs.
By investigating your operating costs, it may be possible to lower these without affecting efficiency or productivity.
If you would like to not have to worry about cash flow because you have a clear startegy in place, why not give Confident Cashflow a call and see how we can help make that happen.