What you need to know about cash-flow and profit
Industry Leaders Lightspeed have written a great article to help you learn the difference between cash flow and profit. We have picked out some of the key points to help you get up to speed.
When looking at a businesses finances the first thing people often look at is profit. Well, this is not always the best way to discover if a business is doing well or not. If you want to know where a business is headed you need to take a look at the cash-flow as well. If you don’t know the difference between the two then stay tuned, you are about to find out.
What is cash-flow?
Cash-flow is the movement of money in and out of a business, usually the revenue minus the expenses.
Incoming cash-flow keeps your business running from one day to the next. It keeps the shelves stocked, wages paid and the power on. Cash outflows are the these expenses, the expense needed to keep a business running.
Cash-flow is important because it is an indicator of a business’s success. When projecting future earnings or looking at the overall health of a business, accountants will look at the cash-flows month by month.
What is profit?
Profit is the amount of money you have left after you have paid all your expenses. For example, if a business generate £4000 in sales (What customers spend on good in the store) and the out going expense for that day are £2000 (costs of wages, rent, stock) then £2000 of profit has been made.
A business needs to be making a profit to be able to make it in the long term.
The main point we want to make here is just because a business is profitable doesn’t mean that it’s flourishing. A business can be profitable but its incoming cash-flow is too low to sustain that profitability.
You can read the full article with examples here.