Over the last few weeks, I have had quite a few calls from relatively new businesses who have got themselves into a bit of a mess. They are all recoverable, but they just need a helping hand in understanding their finances. This says to me that the changes in the economy are starting to bite. When cash was flush there was no need for people to watch every penny. But with inflation and the recent monthly interest rate rises, people are getting nervous and starting to ask for help to support their businesses. Kind of like when I follow a recipe while cooking rather than just making it up as I go along. It always turns out so much better with a bit of help.
So, let’s get real about something that's crucial for every small business owner to understand: the difference between cash flow and profit. They might sound like they're the same thing, but in reality, they're quite different.
First, let's define the two terms. Profit is the money that a business earns after deducting all of its expenses from its revenue, while cash flow is the money that flows in and out of the business in the form of cash or cash equivalents. Simply put, profit is what you earn on paper, while cash flow is the actual money you have in the bank.
To give you an example, let's say you own a bakery. In a given month, you sell $10,000 worth of bread and pastries, and your expenses (ingredients, rent, utilities, etc.) come out to $8,000. That means your profit for the month is $2,000. However, if your customers pay for their purchases with credit cards, and you don't receive the money until the following month, your cash flow for the current month will be $0. You'll have to wait until the credit card payments clear before you have any cash in hand.
This is where many business owners get tripped up. They might look at their profit and think they're doing great, but if their cash flow isn't healthy, they could still run into serious financial trouble. For example, if the bakery owner mentioned above didn't have enough cash on hand to pay their rent or buy more ingredients, they could find themselves in a tough spot, even if their profits were high.
So, to sum it up: cash flow and profit are not the same thing. Profit is a measure of a business's financial performance on paper, while cash flow is the actual money that's coming in and going out. Both are important to keep an eye on, but if you're a business owner, you'll want to pay particularly close attention to your cash flow to make sure you have enough money to keep your business running smoothly especially during these changeable economic times.
Stay ‘Appy and reach out if you need extra ingredients to improve your cash flow recipe.
If I've said it once, I've said it a thousand times. Where's the tax invoice?
