The difference between profit and cash flow.

As a business owner you are often given conflicting advice. On one hand everyone tells you that cash is king and yet 99% of the time your bookkeeper or accountant will give you a profit and loss as part of your management information.

It is easy to see why people get the two confused. Your accountant has just told you that you made £2k profit last month so surely you must now have £2k to play with? So why does your bank account only have £50 in it? Equally, the figures could easily be reversed. So why is there such a disjoint between the profit (or loss) that you’ve made and the amount of money in your bank account?

Let me explain.

The reality is that there is no link between your profit/loss and the money in your bank account. None.

The reality is that even profitable businesses fail.

The profit and loss, when completed correctly, is the true view of all of the sales that you have made during the set period and all of the allowable business expenses. This report will show that you’ve created a business that can generate a profit based upon your current pricing structure and with your current business expenditure.

What a profit and loss doesn’t tell you however is whether your customers are rubbish payers. It doesn’t tell you whether you are a good payer either. It doesn’t reflect any loan repayments that you may have on your start up or expansion capital. It doesn’t show the new piece of machinery that you bought or your finance repayments on any equipment. Likewise, and more importantly, it doesn’t show all of the personal expenses that you allow your business to pay for.

In fact, the profit and loss shows your business through perfect accountancy based rose tinted glasses.

Think of it as a duck on a pond. Your profit and loss report is the duck above water, gliding across all calm and serine.

Your cash flow is the legs paddling frantically under the surface, desperately trying to keep your business going.

The trick is to balance the two. You need to have a profitable business as otherwise you’re playing a loosing game before you’ve even started. However you also need to keep an eye on the balance sheet items; the time it takes for your customers to pay you, the bills that you have coming up, the debt you may have and the money that you take from your business to pay for your fuel, your morning coffee, your work clothes, your gym subscription, Netflix…

The profit is what makes your business. A lack cash is what will kill it.

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