Keeping your business cash liquid – the difference between cashflow and profit
The Lombard Accountants team knows that to really understand the difference between generating a profit and managing cash flow, we need to look at what these terms mean. You might think that delving into the accounts is a job for your adviser, but being in control of your profit and cash flow is an invaluable business skill.
Let’s take a look at the differences between these from the Lombard Accountants team:
- What is profit? – Profit is the surplus that’s left from your income once you’ve paid your expenses, supplier bills and tax etc. It’s driven by creating a profit margin and generating value from your products and/or services.
- What is cash flow? – Cashflow is the ongoing process of ensuring that the business has the available cash (or ‘liquid’ cash) needed to operate. This provides the money needed to trade, pay suppliers, cover wages or buy raw materials etc.
Why is positive cash flow so important?
‘Cash is king!’ may be a cliche these days, but it’s a maxim which underpins any successful business model. Yes, it’s great to make a profit at year-end, but if you don’t look after your cash flow then the business may not survive as long as the end of the year.
What’s needed is good cash flow management to enhance your financial health. And without a careful eye on your cash numbers, things can quickly go awry.
A business can generate high revenues and big profits, but still, be cashflow poor. In other words, it can have earnings at the end of the period but have very little liquid cash to fund its day-to-day operations over the course of the period.
Talk to us about improving your cashflow management
Good cash flow management is all about being in control of your cash inflows (income you’re generating) and your cash outflows (what you’re spending). To achieve ‘positive cash flow’ you need to proactively work to keep your inflows higher than your outflows.
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