Do you know What is the difference between cash and profit ? The majority of the time, people think that businesses only need to be profitable for them to last. But even the most profitable businesses go under, and often for a single reason. It’s because the people running the business focus too much on the business’ profits and forget about everything else that’s just as important – like cash.
Understanding what cash is
What is cash? Basically, it is the amount of money coming in minus the amount of money coming out. Take note that when we say money here, it means cold, hard cash that you can actually use to buy stocks, pay for new inventories or purchase new equipment. It is something liquid and is not something that you’d have to wait for. It’s that simple.
Profit, on the other hand, is the amount of revenue minus the expenses. When you have a positive profit, this only means that you have earned a lot more than what you have initially invested. If you earn £50 from a lemonade stand for example, and all you shelled out was £10 to start the business, you have basically earned £40 in profit.
Where it all goes wrong
So where does it all go wrong? Let’s say the £10 you used to start a business was a loan from a friend. , which you would have to pay back. Let us also assume that you agree to pay your friend back £15, and not just the original £10 they lent you. This means that your profit is down to £35.
Now you realized that to make lemonade faster, you would have to invest in equipment. Let’s say your fiend also lent you their electric juicer, but you’d have to pay them £20 for it. So you have £15 left, with the initial £10 you once again use to buy lemons, cups, and sugar to produce the same amount of lemonade you sold the first time. The problem is, the bully steps in and wrecks your entire lemonade stand, leaving nothing but your £5 which is hidden in your room somewhere. Because you wrecked the juicer, your friend took your £5 away. And now, you have no cash left to start the business again.
There was no doubt that it was a profitable business, but there was just no cash left over. If the original £35 was put to better use, with part of it remaining as cash, there probably would have been enough left over to start the business once again.
These are decisions that you only learn to make when you are equipped with financial awareness. You learn to anticipate when the bullies are going to strike. You are also wise enough to know whether you really need that juicer this early, or if you could wait until you have more profits to cover it.
That bully could be customers not paying on time, bills needing to be paid, unexpected costs.
Ask yourself these questions:
- Do you struggle with cash flow?
- Are you worried about your finances?
- Are you a fast-growing business that is struggling with keeping the cash moving?
- Does your business have an unpredictable sales pattern?
- Do you know how much money will come in and out of your business and where that leaves you ?
If you’ve answered ‘Yes’ to any of these questions, then check this out. Take charge of your Business Cashflow with the ABC Method. Without Cash your Business is screwed. It’s time to take charge of your Business
I hope you can now answer that question What is the difference between cash and profit ? Get in touch with us to see how we can help you with figuring out and managing your cash flow. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.
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