Cashflow and profit are very different. Business owners can often be confused into believing they are highly profitable because they have a large amount of cash and vice versa.
It is important to understand the difference between the two concepts.
What is cashflow?
The money that comes into, through and out of your business. It doesn’t include money owed to you from customers or credit from suppliers.
Insufficient cashflow means a business can’t meet its financial obligations such as paying suppliers or employees.
What is profit?
Profit is how much is left of your revenue once all costs have been deducted. It includes all income and costs that are due but not yet received or paid.
A business cannot survive in the long term if it is not profitable.
What is the difference?
The key difference between profit and cashflow is time.
Profit takes account of transactions as they are generated whereas cashflow takes account of transactions as they are paid or received.
As an example:
In the above example, at 31 March, the company has a positive profit but a negative cashflow.
The cashflow does not become positive until 30 April when the money is received from the customer.
Understanding this key difference can be crucial in keeping your business going.
A business can be highly profitable but if customers are on a 90 day payment term but suppliers are a 30 day payment term then you may not have the cashflow to keep the company going.
If you would like any assistance in understanding your profit and cashflow or would like a cashflow forecast preparing, please get in touch with us.