Do you know the difference between profit and cash?
It’s all money, right?
Technically, it is all money. But it is not the same kind of money.
Many people assume profit and cash are one and the same. But in business, they are very different metrics, each with a significantly different meaning.
Understanding the differences between the two – and how to manage them – is vital for the financial health of your business.
After all, you want to make sure that you are using those hard-earned dollars wisely!
If you need a bit of help getting your head around each element, this blog has you sorted.
The Difference Between Profit And Cash
What Is Profit?
From a pure numbers point of view, profit is simply revenue minus expenses. It is how much money is left after you have paid all the outgoings. Think of it as your net revenue.
Profit is recorded in your accounts in real-time, which may not be a true reflection of your cash flow situation. For example, as soon as you send an invoice to a client, the amount is recorded in accounts receivable as profit, even before it has been paid.
The same thing goes for expenses. A bill you receive may be recorded in your books before you have actually made payment.
Long story short: a profit written in the books doesn’t necessarily equal cash in the bank in real-time.
What Is Cash?
Often referred to as cash flow, cash describes the money that is flowing into (and out of) the organisation from any source, including investors or direct business activity. Your cash provides you with the ability to pay your expenses.
If there is only enough cash coming in to meet the expenses with none left over, the business is surviving but unable to grow. If there is not enough cash to pay the bills, this is negative cashflow. That can sink a business much more rapidly than you may anticipate.
For a successful business, the amount of cash coming in must be greater than the expenses.
Unlike profits, cash refers to the actual money you have at any one time, in your bank account.
How Profit And Cash Affect Business
A common way to describe the effects of cash and profits is comparing them to food and oxygen.
In this example, cash is similar to oxygen. We need a constant supply of it to survive, and cannot last long without it. Profit, on the other hand, is more akin to food. Although it is essential for long-term survival, we can go without it for a short time. And of course, we need both things to thrive, not one or the other.
Cash flow and profit are not necessarily connected. Just because your business is profitable doesn’t mean the cash flow is positive.
Timing can be everything in business. Get things wrong, and even a profitable venture can fold. If you can’t pay your bills because you have no actual cash in your accounts, that’s a problem – even if you have profits on the way.
Striking that delicate balance between profitability and positive cash flow is all about careful financial management and timing. You need to show a profit to grow your business but must maintain that positive cash flow to keep it going day-to-day.
Ensuring you get your finances right can be time-consuming and often confusing. That’s why so many businesses outsource to the experts, it’s one thing you really can’t afford to get wrong!
Having someone knowledgeable helping you to stay on top of your finances can be the difference between positive and negative cash flow.
So, if you have been thinking about bringing a bookkeeper on board, get in touch with the team here at Admin Army. We wage war on all your bookkeeping and administration tasks so that you don’t have to! Drop us a line today to see how we can help boost your finances.