Why You Should Get Excited About Understanding Cashflow Versus Profit

Cashflow. Many business owners are under the impression that cashflow is the name of the game, but don’t be fooled. Cashflow is only one part of the money equation that makes your business run smoothly and puts money in your pocket.

The first thing to understand is that cashflow is not enough. The story goes that one businessman would say, “If there’s cash coming in, then there is profit in there somewhere.”

Sadly, that isn’t true, but this belief had this business owner trying to increase cashflow to the exclusion of paying attention to profit. He ended up losing his business because you have to actually have profit.

So, what is the difference between cashflow and profit, and how do they relate to each other? I’m glad that you asked.

Cashflow, as the name implies, is the money coming into the business. Make no mistake: no cashflow means you don’t have a business because you have to have some money to pay the immediate bills.

Profit, on the other hand, is how much money is left over after you’ve paid for everything else. We won’t get into the difference between gross and net profit here, but just understand that all of your expenses, payroll, cost of goods sold (what you paid for merchandise that you sold), taxes, money invested in training and equipment upgrades, and anything else that you spend or invest money in to run the business or to make the business run better for future plans reduces your profit.

Make no mistake, though: You need to put money into some of those things that take away from your profit. For example, you can have cashflow coming in, but if you aren’t maintaining equipment and letting it break down before working on it, you may be setting up a situation in which your cashflow isn’t enough to pay for that equipment repair. As a consequence, your business may screech to a halt until you have enough money from cashflow and/or borrowing to repair that equipment.

In this scenario, you had positive cashflow, but not planning for future expenses caused you to lose all of the profit that you could have had.

If that goes on too long, you get to the point where you don’t have enough cashflow and aren’t able to borrow enough money to keep everything going. And, then, you no longer have a business.

To put it simply, you need to keep track of both cashflow and of profit.

If you’d like help in knowing what those numbers really are for your business, what your cashflow and your profit is, give us a call at xxx-xxx-xxxx. We’ll be happy to chat with you a few minutes.

Our clients have found that, with our help, they have been able to both increase their cashflow and increase their profit, and we will be happy to help you, too.