Cash vs. Profit: Do you know the difference?

Not sure what the difference is? We’ll look at managing cash flow and profits.

Cash vs. Profit: The Critical Differences

Net Profit and Net Cash Balance (i.e. cash held in your Company bank account or in your wallet) are not the same. Cash is the engine that drives a small business. A Company’s success is contingent on its’ ability to manage its’ cash.

Analyzing cash flow helps the small business owner translate financial results into something everyone can understand – the flow of cash in and out of the Company, and the impact this flow has on the Company’s liquidity and viability.

Cash flow analysis helps the owner to gain a deeper understanding of the core business activities and the management decisions that impact the Company’s continued profitability and sustainability.

Why are cash and profit different?

The income statement contains both the Company’s revenue and expenses. However not all revenue and expenses reflect the timing of cash receipts and cash payments The income statement may also include non-cash items such as depreciation, and the gain or loss on sale of fixed assets.

The income statement does not report all business transactions involving cash.

Sources of cash:

  • Sale of surplus assets.
  • Cash inflow from increased loans, lines of credits and other liabilities.
  • Profitable operations.
  • Owner’s Investment of cash.

Uses of cash:

  • Operating losses.
  • Increase in assets.
  • Decrease in liabilities.
  • Withdrawals of Equity

It is important to note that over the long run, profitable operations provide the only sustainable source of cash.

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