As a small business owner, you’ve likely heard the terms “cash flow” and “profits” used interchangeably. However, mixing these financial metrics up can cause severe consequences for your business.
The distinction between the two can significantly impact your business’s financial health and your decision-making process.
Here is a quick guide to cash flow and profits so you can avoid confusing the two.
What are profits?
Profits are the surplus that remains after all expenses have been deducted from your income.
If you have worked out a solid business model (and consulted a good accountant) you should be able to see profits on your bookkeeping records.
However, profits on paper do not always translate to available cash in your bank account.
What is cash flow?
Cash flow is the net amount of cash moving in and out of your business.
Positive cash flow means you have more cash coming in from sales and other inputs than going out in operational costs, salaries, etc.
Equally, negative cash flow is the opposite – more money flowing out of the business than coming in.
Unlike profits, cash flow reflects the liquidity of your business at any given time.
Why they are both important
Understanding profit and cash flow can significantly benefit your small business:
Both profits and cash flow are indicators of a business’s financial health, but they serve different purposes and should be equally well analysed by a trained accountant.
Understanding these two critical metrics, means you are better equipped to make informed decisions that contribute to your business’s long-term success and stability.
If you need advice on managing your profits and cash flow, or you simply have more questions on the subject, get in touch today.
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