Accountants love profits. Business owners love cash accounting or what I call bank balance accounting.
That’s because accountants can confuse their clients and use complex words. It makes them sound sophisticated and educated. Special even.
But to their client’s bank (cash) balance accounting makes more sense and you understand it.
Profit is theory. You can’t go to Flight Centre, show them your profits and buy 2 first class tickets to Paris. But you can with cash. And if you spend $10,000 on tickets in your mind you have lost $10,000.
So as a business owner bank (cash) balance makes a lot more sense. But which is better?
Truthfully? They both are.
Understanding financial matters is scary as a business owner and getting your head around the differences between cashflow and profit can be challenge on how your business operates.
So, let’s look at the differences:
- Profit refers to the amount of money your business has left after subtracting all expenses from your revenue. It’s a measure of your company’s financial success over a given period, whether that’s a month, quarter or a full 12-months. It excludes things like money GST, taxes and investments.
- Cashflow on the other hand measures the inflow and outflow of cash in your business. This includes both your operating, GST and investment activities.
Why is it important to make a profit?
Profit is a measure of the financial success of your business. It’s also a key factor in your growth as an organisation. Healthy profits usually mean you have the surplus cash needed to reinvest in the business, and to pay yourself and your team.
However, you can only make a profit if you have enough liquid cash to keep operating – and this is where the importance of cashflow is important.
Why is positive cashflow so essential?
Poor cashflow is one of the biggest factors in most business failures. Businesses can be profitable but still run out of cash.
Cash is the lifeblood of the business.
To operate effectively, you need more cash inflows than cash outflows. If not, you don’t have the cash to purchase raw materials, pay your workforce or buy the services that keep you operating.
Positive cashflow is all about ensuring that there’s more cash coming in than expenses going out.
Profit is an excellent measure of your financial success. But positive cashflow keeps the wheels turning day in, day out.
Positive cashflow helps you:
- Stay operational, with enough cash in the kitty
- Meet your financial obligations as a business.
- Allows you to invest in your expansion, growth and scale-up.
- Sustain your long-term success as an ambitious business.
There is a reason why we say ‘cash is king’. Because from a business perspective it really is.