Profit v Cashflow - what's the difference?
Both profit and cashflow are important for a healthy growing business but they are not the same thing. Just because a business is profitable it doesn't mean that there is sufficient cash in order to sustain itself. It is important to understand and monitor both in order to run a successful business.
So what are the differences?
Generally speaking this is the difference between your sales and expenses. Not all expenses effect profit though, it is only those that are directly related to your trading activity that impact upon your profit.
Expenses that effect the profit of the business include purchases of materials, staff and premises costs, travel expenses and stationary.
The cashflow of the business refers to the actual flow of cash in and out of the business. This is linked to all transactions within the business not just those effecting the profit and loss.
Examples of expenses incurred that don't impact upon the profit and loss are purchases of equipment and machinery, loans received by the business and any cash personally taken or input into the business. Instead these are recorded on the balance sheet of the business as assets or liabilities rather than business expenses reducing the business profit.
Another big difference between profit and cashflow is timing. Profit and loss transactions are recorded at the point the transaction takes place whereas cashflow transactions are recorded according to when the cash is actually received or spent.
To illustrate this, if we consider an electrician who has recently rewired a property. The date of the sale per the profit and loss is the date the invoice is raised usually the date work is completed however the electrician may have to wait before receiving payment for his services. Likewise if the electrician has a trade account with an electrical wholesaler then they may purchase materials for the job but have 30 days before payment is due. The point at which the sale or expense are incurred are the date at which the invoice was raised or the items were purchased but the date at which they impact upon the cashflow are when the cash was received or spent.
It is therefore important for businesses to monitor both the profit and loss of the business and their cashflow. A business needs to be profitable as well as sustain their cashflow in order to ensure that they are able to fulfil their liabilities.
Contact Ashored for help and support with monitoring your Profit and Loss and Cashflow.