I’m sure you’ve heard this saying before and it’s quite prevalent in today’s times. No doubt, as a business owner you have learned a lot recently on how fit-for-purpose your finance function is within your business. COVID-19 has put many businesses on the brink of closing down and keeping a close eye on financial performance and cash flow has never been more important.
However for those that are not financially minded sometimes it can get confusing between profit and cash. I’ve had many discussions with clients on why there is cash in the bank but the company isn’t making profit or vice versa. So let’s start by going back to basics:
- Profit is revenue less expenses (including corporation tax), however don’t forget that some expenses are paper transactions meaning no cash exchanges hands such as use of home allowance, mileage and depreciation.
- Cash is how much is immediately available within your business bank.
Where you may be making a profit yet you’re experiencing a shortfall in cash, this probably means your income is tied up in debts and assets. For example you may have purchased a lot of stock or machinery or your clients owe you money.
Alternatively you may be making a loss yet you have a surplus of cash. This probably means your income is tied up in liabilities, for example tax payments and suppliers you haven’t paid yet or a director’s loan.
Profit is essential for business to grow, but as the saying goes cash is reality.
If we compare profit to food and cash to air, you need air to survive but you can live for a while without food. Certainly both are essential for business survival, but cash is necessary for the short term.
Watch the video below for more information on Cash vs Profit:
We recommend forecasting your future cash flow and understanding where the pinch points could be. This will enable you to plan for them rather than being reactive and caught out. There are many apps available that make cash flow forecasting really easy.
Float is our favourite. This app even allows you to plan out different scenarios, such as a new product line or closing an office, to see the impact it will have on your cash flow.
I’m sure you’ve heard this saying before and it’s quite prevalent in today’s times. No doubt, as a business owner…Read More
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