Part of our roles as lifetime accountants is to keep you — whether you’re a client of ours or not — as informed as humanly possible about the intricacies of managing your finances.
Something we’re often asked about is the difference between profit and cash flow and understanding why a company can have a profit but not have cash. So we’re going to do your best to clear some of that up for you.
So let’s start with a basic vocabulary lesson:
- Revenue is the money you receive when you sell a product or service.
- Expenses are the costs associated with running the business.
- Profit is your revenue minus your expenses.
So let’s pretend you want to have a bake sale. Your expenses would include your ingredients, the packaging, publicity posters, and anything you buy from the party store to dress up your table and the sale area. Maybe this comes out to be $15. Now, let’s pretend you charge $2 an item, sell 40 items, and make revenue of $80. Your profit is $65.
In this scenario, you can take the $65 to the bank, but that’s not the case with actual businesses. If you were a business-owner, you’d take this profit and invest it in new equipment, materials, employees, and taxes. And when these costs get in the way of actually operating budgets, that’s where cash comes into play.
Cash flow is the money used to keep the business operational — and whether you’ve got it on-hand or you’ve got to take out a loan, it’s the real-time stream of money in and out of your business. So a business can be making a profit but not have cash because profit is computed using revenues and expenses, which are different from the company’s cash receipts and cash disbursements. And just because a business is profitable on paper doesn’t mean it can actually pay its bills.
Having a negative net income and a positive cash flow is common, but it’s still bad for business and requires some bailing out.
If you have any questions about how these dynamics work and how a Broussard Poché CPA can help you navigate your financial matters, give us a call.