The Difference Between Cash Flow and Profit
Big cash flow ≠ Big profits for your business. The difference between cash flow and profit is an important concept to grasp, let's take a closer look.
Cash Flow VS Profit
One of the biggest misconceptions out there is that large cash flow means big profits for a business. That isn't always the case -- in fact, you could have a business with a lot of cash flow that is on the verge of shutting down.
Cash flow simply tracks how much money you have coming in and going out. Profit on the other hand tracks what you have left over after you take the income and then subtract all expenses. It sounds very similar to the idea of tracking cash flow, but timing is what makes the difference here.
Let's take a look at three different scenarios to get a better idea of how these two accounting concepts differ.
Company A - The Ideal Cash Flow and Profit Example
Everything is goes perfectly for company A. They have plenty of clients and expenses are well under control. Each month there is plenty of cash coming in and after all expenses are subtracted there's a nice profit left for the business owner. The company is in good shape to keep running smoothly.
Company B - Huge Cash Flow But No Long Term Profit
Things haven't been going well for Company B for a while and the owner has decided to close shop. First though he's selling off all his equipment and assets. As a result, there is a lot of cash flowing into the business and for a month or two there may even be some decent profits on the books. The problem here is that this isn't sustainable and the business isn't planning on having any long term profits. This is a good example of how positive cash flow isn't always a good indicator of the viability of a business.
Company C - Cash Flow Troubles That Will Cut Into Future Profits
Things are going along smoothly for Company C until they run into a bit of a cash flow problem. Because of some big equipment expenses and a few big customers who are bad about paying their bills on time, there isn't enough money coming in to pay all of their expenses. This could result in some late charges and even having to give employees or independent contractors some unpaid time off. If negative cash flow goes on for longer, the company owner may risk not being able to buy stock to make more products and down the road even have utilities turned off. Even though the company has a good product and a good customer base, not managing cash flow well can put it into a lot of trouble.
In Conclusion
Positive or high cash flow and profit aren't the same thing and the two terms and ideas behind them should not be used interchangeably. While it's good to keep track of the profit you're making month to month, it's just as important to keep an eye on cash flow as well.
Cash Flow VS Profit
One of the biggest misconceptions out there is that large cash flow means big profits for a business. That isn't always the case -- in fact, you could have a business with a lot of cash flow that is on the verge of shutting down.
Cash flow simply tracks how much money you have coming in and going out. Profit on the other hand tracks what you have left over after you take the income and then subtract all expenses. It sounds very similar to the idea of tracking cash flow, but timing is what makes the difference here.
Let's take a look at three different scenarios to get a better idea of how these two accounting concepts differ.
Company A - The Ideal Cash Flow and Profit Example
Everything is goes perfectly for company A. They have plenty of clients and expenses are well under control. Each month there is plenty of cash coming in and after all expenses are subtracted there's a nice profit left for the business owner. The company is in good shape to keep running smoothly.
Company B - Huge Cash Flow But No Long Term Profit
Things haven't been going well for Company B for a while and the owner has decided to close shop. First though he's selling off all his equipment and assets. As a result, there is a lot of cash flowing into the business and for a month or two there may even be some decent profits on the books. The problem here is that this isn't sustainable and the business isn't planning on having any long term profits. This is a good example of how positive cash flow isn't always a good indicator of the viability of a business.
Company C - Cash Flow Troubles That Will Cut Into Future Profits
Things are going along smoothly for Company C until they run into a bit of a cash flow problem. Because of some big equipment expenses and a few big customers who are bad about paying their bills on time, there isn't enough money coming in to pay all of their expenses. This could result in some late charges and even having to give employees or independent contractors some unpaid time off. If negative cash flow goes on for longer, the company owner may risk not being able to buy stock to make more products and down the road even have utilities turned off. Even though the company has a good product and a good customer base, not managing cash flow well can put it into a lot of trouble.
In Conclusion
Positive or high cash flow and profit aren't the same thing and the two terms and ideas behind them should not be used interchangeably. While it's good to keep track of the profit you're making month to month, it's just as important to keep an eye on cash flow as well.
Comments
Post a Comment