Cash vs Profit: The Hidden Truth Every Business Owner Needs to Know
Elanie van Greuning • October 9, 2024
Why Understanding the Difference Between Cash Flow and Profit Could Save Your Business
Cash is King.” It's a phrase you’ve probably heard before, but do you know why it matters so much for your business? When it comes to business growth, understanding the difference between cash flow and profit is crucial. We’re here to help you master both and take control of your business’s future. Let's talk.
The Cash Flow Reality
Cash flow is a different beast altogether. It’s the money flowing in and out of your business for everyday operations like taxes, equipment, or loan repayments. Here’s the catch: even a profitable business can suffer from poor cash flow, and vice versa.
Cash vs Profit
As a business owner, your goal is to make money, but what if I told you that understanding the difference between profit and cash flow could make or break your success?
The Profit Myth
Net profit is the amount left after deducting all business expenses from revenue. To boost your profit, you’ll need to focus on areas that affect both revenue and expenses. For example:
- Negotiate smarter: Renegotiating with suppliers can lead to lower stock costs or reduce the need for excess inventory.
- Enhance customer engagement: Better customer interactions can lead to higher sales by tapping into what they really want.
- Optimise staffing: Efficient rostering can help you reduce costs without sacrificing service quality.
The Cash Flow Reality
Cash flow is a different beast altogether. It’s the money flowing in and out of your business for everyday operations like taxes, equipment, or loan repayments. Here’s the catch: even a profitable business can suffer from poor cash flow, and vice versa.
For instance, you might have strong cash flow but still struggle to turn a profit due to unaccounted expenses. Similarly, a profitable business can have a cash shortage, threatening its day-to-day survival.
Planning for Growth
Want to know how fast your business can grow? Your projected cash flow holds the key. Our team
can help you forecast with precision, so you can make informed decisions for the future.
Keeping Cash on the Throne
Your business can’t survive without a healthy cash flow. To keep cash in the driver's seat, here are six essential tips every business owner should know:
- Monitor your cash flow: Build a cash flow statement and update it regularly. Spot a shortfall coming? Act immediately to avoid a crisis.
- Create a cash buffer: Set aside reserves to protect your business from unexpected expenses or downturns.
- Plan for revenue dips: Maintain at least two months’ worth of operating expenses in your account to cushion against slower periods.
- Stay grounded with sales expectations: If your sales projections look bleak, adjust your approach early to avoid financial strain.
- Safeguard payments: Implement upfront credit checks to reduce the risk of late payments. Get clear payment terms in writing and stay in regular contact with clients to keep payments on track.
- Stick to your budget: Every dollar spent affects your cash position. Budget wisely for essentials, and avoid overspending.
Need Help? We're Here for You
Cash flow management is the lifeblood of your business. If you’re looking to improve your cash position and secure your business's future, reach out.
Let's work together to make sure your cash flow stays strong and steady.
We’re trading in uncertain times, where changes to the global economy can happen overnight. This creates a real challenge for your business, making it difficult to plan ahead and understand the short to medium-term future of your financial strategy. But by monitoring and analysing your business data, it is possible to get back in control of your financial management, and to reduce some of the financial uncertainty. Good business decisions are based on solid and reliable information. That’s why it’s so important to track and monitor your business performance.Using the metrics and data from your business dashboard, you can follow your progress against budgets and financial strategies – and see when fast, evasive action is needed.
Running a business can be deeply rewarding, but it also comes with pressure. At times, it can feel like the responsibility rests solely on your shoulders: managing cashflow, people, operations, growth, and compliance - all while trying to make the right decisions, day after day. That’s where we come in. At Crossroads, we don’t just take care of your accounting and tax - we partner with you in the bigger picture. As your business coach, we walk alongside you, helping you step back from the day-to-day and take a clearer look at where your business is going, and what might be holding it back.
Understand what you own, what you owe, and how to use that information to make confident business decisions.