Profit V Cashflow

For small business owners, (especially those just starting out) it can be overwhelming understanding the different terminologies of your business' bookkeeping and financial reports.

Whether you do your own bookkeeping or outsource it, you should understand the two important terms - Profit and Cashflow, and the difference between the two.

A profitable business is a successful business and obviously the ultimate aim, otherwise why would you bother? However a positive cashflow doesn’t always indicate a profitable business and a profitable business could experience negative cashflow. 

Profit: is the net amount of Income, less expenses. Gross Profit is after direct costs have been deducted. Net Profit is after all other operating costs have been deducted. You need to ensure your expenses are less than your income in order to be profitable. If you're P&L is currently showing a Loss, you need to find ways where you can either cut back on your expenses or increase your revenue.

Cashflow: is the result of cash in and cash out of a business.

If a business's cash received exceeds its cash spent, it has a positive cash flow. Negative cash flow is when a business has more outgoing cash than incoming. Which then means there is a deficit and expenses are not able to be covered. This usually results in an injection of funds being needed which can come in the form of owners equity, a loan from a Director/Share Holder or bank financing/overdrafts. None of these are ideal, but if they are needed your business usually then needs to be able to pay the money back.

Remember that 'cashflow’ out of the business includes your Liabilities which show up on your Balance Sheet, NOT your Profit & Loss. (I might post another blog post on how to understand the two reports!)

Profit and Cashflow - Both are important to a businesses long term success!

Reach out if you need further assistance with understanding and keeping on top of your business bookkeeping in order to have a profitable business and positive cashflow.