2016-10 - 2 minute tutorial: The difference between cash and profit

Jonathan Cotton Debtor Daddy

If there’s one phrase found on the lips of finance-conscious small business owners more often than any other, it’s surely this old chestnut: “Cash flow is king”.

But how often does the average small business owner actually walk the talk of ‘cash is king’? Could it be that the simple distinction between ‘cash’ and ‘profit’ is actually unclear for many SMBs? And just what is the difference?

2016-10 - 2 minute tutorial: The difference between cash and profit

Simply put, profit is an excess of revenue after expenses have been subtracted. Cash flow is the inflow and outflow of money from your business. Put another way, profit is what you record when the sale is made and cash flow is what you record when the money is actually received.

Cash flow is crucial for supporting the daily operating expenses of your business, paying wages, paying taxes and purchasing inventory. If this money is tied up in accounts receivable, you’ve got serious problems. Over time, a lack of profits will have a negative impact on cash flow, but cash flow — or lack thereof — is always an immediate issue.

For SMBs this means that getting paid on time is crucial to staying operational. Without cash, bills don’t get paid. When bills don’t get paid, businesses fail.

So how to keep the cash flowing?

  • Offer discounts for prompt payments

  • Ask for a deposit when you take a client’s order

  • Issue invoices immediately and set payments expectations from the outset

  • Automate your invoice reminders to follow up on overdue accounts

Easy, right?

Jonathan Cotton Debtor Daddy

Debtor Daddy works with your existing online accounting software proactively reducing your debtors and increasing cash flow.