As an entrepreneur, it is easy to get excited about the capital and growth your new business accrues. Although your company’s profit and cash flow are positive financial elements, it is crucial to understand that both are different. Many excited business owners may misunderstand the difference of profit and cash flow and mistake the two as interchangeable concepts. Having a profitable business does not necessary translate as having sufficient cash flow to sustain itself. Regardless of the financial health of your company, it’s important to be aware and understand the difference between profit and cash flow.
Profit can also be referred to as net income, or the difference between revenue and expenses. When companies incur profit, it doesn’t always mean immediate income. For example, you could sell a product or provide a service that costs $100 and send an invoice to your client the 1st of this month. Although you are earning revenue, at the time you completed the exchange, you will not receive cash until the invoice has been paid for by end of the month. Likewise, incurring an expense does not always mean your cash decreases immediately. Correctly managing cash flow can help insure you have the accurate means to pay invoices on time without relying on future profit.
One way to manage cash flow is to account for prior sales. Collecting cash from prior sales or services can provide cash for current production and delivery costs. This is a useful method if you sustain a level amount of sales each month. But if your sales continue to increase each month, using cash from last month may not be sufficient for current manufacturing costs. Additionally, you could delay cash payments and fulfill payments in the future to save cash for current production costs.
Profit is ideal for business growth, but it is important to carefully consider and predict cash flow within your business. For more questions regarding business accounting, contact us at Bakersmith Bookkeeping Group. Our team can help you stay ahead of your financial statements, so you don’t have to worry about your books. Get in touch with us today.