Many forget that the growth has to be funded and a clear financial balance between Profit and Cashflow is imperative, so I suggest ALWAYS consulting your trusted adviser when embarking on a growth strategy.ĮQUITY – owners inject more money into the businessĭEBT – borrowed money which the bank needs to see an effective Profit/Cashflow plan Unfortunately, I’ve seen this happen where a business owner’s ambition is outweighed by their ‘money ability’. The careful management of Profit and Cashflow is important if you want to grow your business. It takes strategic planning under the guidance of your trusted adviser as there is no one size fits all. While profit can vary depending on carefully considered strategic spending, I by no means say that running on low profit is the right strategy and that is because you need to have good profit in the first place to give yourself options. Profit is important as there are a number of key items that are directly affected by your profit. When I say assets, it is an increase in Debtors, Cash and/or Plant and Equipment, or a combination of all three and for Liabilities, it could be paying down debt or reducing equity in the business. When a business is making a Profit, it is increasing Assets and decreasing Liabilities. You could be showing a profit per item you sell therefore your Profit is up, however the timing of the payment of your invoice can leave you in a low Cashflow situation.
![what what](http://keeponcashflow.com/wp-content/uploads/2016/10/chashflo-post.jpg)
Point 3 – You can have High Profitability but low Cashflow This timing has a negative effect on your Cashflow.Īs a business must not trade insolvently and must be able to meet its debts when they fall due, Cashflow must be managed. Point 2 – Cashflow determines the viability of the businessĪs you would know, sometimes you have done a job and paid for the materials, but the client doesn’t pay you straight away. ‘Where am I at right now’ compared to ‘What do I need?’ It’s like the stethoscope on the heartbeat of your business. It’s a ‘on-paper’ measure of what you charge in ratio to what it costs to deliver your product or service.īy definition … Cashflow is a measure of the timing of what’s coming and going out. They are both financial parameters however they represent different markers.īy definition … Profit is the surplus left after all expenses are deducted. Point 1 – Cashflow and Profit are not the same thing
![what what](https://www.smartsheet.com/sites/default/files/2020-09/IC-Project-Cash-Flow-Statement-Hypothetical.png)
![what what](https://www.cashflowgame.co.uk/data/include/cms/wordpress/cashflow-financial-statement.png)
I always say … “You could be the most profitable business in the world but without cashflow you’re dead”. The mystery lies in the understanding of the difference between Cashflow and Profit and managing the balance between them. Large businesses also often have a larger kitty to ride out the leaner times caused by ‘timing’ of payments which many small to medium businesses don’t enjoy the luxury of. Large corporations have an advantage in that they have a CFO or teams of accountants always analysing the financial position of the business, however for the small to medium business the true financial position of the business is often a mystery. Often, in simple terms, they are spending the money from a sale before it’s hit the bank. It tells me instantly that they don’t fully understand the difference between Profit and Cashflow. This is an excellent question and one that is often left unanswered to many. I would love a dollar for every time I’ve heard a business owner say “Where’s the money in my business?”