Are you struggling understanding the difference between cash flow and profit in your business?

Do you ask your bookkeeper or accountant why you have no money when they are telling you that you’ve made a profit?

Or do you look at your Profit and Loss Statement to work out if you can spend money on new equipment or draw money from the business?

Profit is not Cash Flow!

This seems obvious. However, many business owners often confuse the two. Small businesses often rely on their Profit and Loss Statement to assess their cash flow position. But, this only tells part of the story and can lead to disaster and in many cases will be the collapse of the business.

Profit and cash flow are related. But they are different measures of your businesses performance and position. Did you know that even very profitable businesses can have cash flow issues?

To truly understand the link between Profit and Cash Flow, you also need to look at your balance sheet. The assets your company holds (the items of value your business uses to generate income, for example equipment and machinery) and the debts to be paid (money borrowed to acquire those assets), greatly affect your cash flow, but not your profit.

Some of the balance sheet items that will affect your cash flow are:
• Outstanding Debtors (Accounts Receivable)
• Payments for Inventory (stock)
• Creditor Payments (Accounts Payable)
• Loan Repayments
• New or increases to existing loans
• Purchasing assets, for example motor vehicles, equipment or office furniture.
• Selling of those assets
• Cash drawings by owners or dividend payments
• Tax and Superannuation Payments

(this list is non-exhaustive, there may be others specific to your business)

Money in and out of the balance sheet will not show on your Profit and Loss. Your Profit and Loss will calculate your revenue (sales) less your expenses, to give you a profit or loss figure. These figures go into your cash flow, but they are not the full story.

Understanding the movements of cash in and out of your business is key to running a successful business.

Perth Bookkeeping Professionals run Cash Flow Coaching programs for small businesses as well as working with you to produce sets of reports that include Cash Flow and Profit and Loss reports for use in your business. For further information on our coaching sessions please contact us. Or you can book in for a free Coffee and Coaching session here.