One of the most important things a business owner can understand is the difference between profit and cash flow.
You might have a profitable business and still experience periods when cash is tight. On the other hand, having money in your bank account doesn’t necessarily mean your business is profitable.
Understanding the difference can help you make better decisions about expenses, hiring, growth, and financial planning.
What Is Profit?
Profit is generally the amount left after your business revenue is reduced by its expenses.
For example, imagine your business generates $20,000 in revenue during a month and has $15,000 in expenses.
Your accounting records may show $5,000 in profit.
But that doesn’t necessarily mean you have $5,000 available to spend.
What Is Cash Flow?
Cash flow focuses on the movement of money into and out of your business.
Money can come into your business through customer payments, loans, investments, or other sources.
Money can leave through expenses such as payroll, rent, software, supplies, taxes, loan payments, and other obligations.
The timing of these transactions matters.
Why Can a Profitable Business Have Cash-Flow Problems?
Consider a business that completes a large project and sends a $10,000 invoice to a customer.
The revenue may be recorded, but the customer might not pay the invoice for 30 or 60 days.
Meanwhile, the business still has bills to pay.
This is one reason business owners need to look beyond revenue and profit when evaluating their financial position.
Three Numbers Worth Watching
While every business is different, business owners should regularly review information such as:
Revenue
How much money is the business generating?
Expenses
Where is the business spending money?
Cash position
How much cash is available, and what payments are coming up?
Looking at these numbers together can give you a more complete understanding of your financial situation.
How Better Bookkeeping Can Help
Accurate and timely bookkeeping gives you access to financial information that can help you understand what’s happening inside your business.
Instead of waiting until tax season to look at your numbers, regular financial reporting can help you identify trends and make decisions throughout the year.
At Flourish Financial Solutions, we help business owners organize their financial information so they can spend less time worrying about their books and more time focusing on their businesses.
Turn Your Numbers Into Better Decisions
Your financial statements aren’t just documents for your accountant.
They can help you understand your business, identify opportunities, plan ahead, and make more confident decisions.