Understanding the differences between profit and cash flow is critical as a business owner, yet many people get these concepts confused or simply do not understand them at all. The key to understanding these two is knowing how they are recorded and recognizing the impact that each has on your business.
First let's clearly define each of these terms. If you're looking for Huebsch dealers in Charleston, SC, have you thought about using something better? Speed Queen and Continental are great choices. Call T & L today to learn how we can save you money!
How Profits and Cash Flow Are Different
Cash flow is the difference between the cash received and the cash used in the process of completing business transactions. This can be boosted in a business in a few different ways. An increase in cash flow can come from selling an asset or a capital injection from the owner or investors of a business. These increase the cash levels in the business but are not considered profit because they are not derived from the business's normal activities.
Profit is the revenue generated by the sale of services and products. Income or profit statements often include items like depreciation expenses and assets sold at a loss or profit. A buildup of inventory will also effect a profit statement.
Utilizing an accrual method of accounting can help you have a better understanding of cash flow and profits in your business. When you use accrual accounting you track all events that result in a profit or a loss for your business for a period of time and then report them on your income statement. This includes activities like:
- Paying wages
- Paying supplier invoices
- Equipment repairs
- Insurance payments
- Equipment and other asset write offs
Taking extra steps to manage your cash flow in the case of winning a contract to provide work over a set amount of time is important because this may not be directly reflected on your income statement.
The bottom line: Cash flow is recorded when the money is received, profit is recorded when the sale is made.
Understanding how profit and cash flow are measured can lead you to improve these metrics within your company. Ensuring an accurate accounting of all sales, expenses and monies owed is key to increasing your company's profitability. Profitability does not always ensure success. Profitable companies do go out of business. If you need to pay suppliers more slowly - do so - however do not let your slow pay status cause you to incur late fees or damage the relationship with your suppliers.
Find ways to cut costs in your business. Evaluate all existing supplier contracts, advertising contracts, utility costs and services. Taking the time to call companies - like your cable and internet providers - can net you deals that will save you money and increase your profitability as a business. Brainstorm ideas to increase cash flow - two or three really good ideas can give your business a significant boost. Ask your employees for ideas to generate new business. Maybe customers have been asking for something specific in your business - find a way to give them what they want so that they keep coming back and bringing their friends.
If you are looking for additional resources from building your business to increasing customer loyalty, see our previous posts from the sales experts at T & L Equipment for great tried and true industry tips.
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