The difference between cash flow and profit
The difference between cash flow and profit is crucial to understand when you’re running a business. It’s also possible to have short term cash flow problems but to still be a profitable long-term business. Ideally though, you want to have good cash flow and be profitable.
What is cash flow?
Cash flow refers to your business’ ability to pay your bills when they’re due. This includes your tax obligations to the Australian Taxation Office.
The timing of your business expenses and when you receive your revenue affects your cash flow. Ideally your major expenses should coincide with when you receive your revenue. If not, you should try and arrange your finances so this happens as often as possible.
If the money flowing out of your business exceeds the amount flowing in, you have negative cash flow. A negative cash flow isn’t sustainable for very long, though there may be times when it can’t be avoided.
A positive cash flow is the opposite situation – more money is flowing in than flowing out.
What is profit?
There are two types of profit: gross and net.
Gross profit is your profit less the cost of producing the product or service you sell.
Net profit is your gross profit less any other business operating expenses, including taxes.
Gross profit can be used for other business expenses or it can be distributed to business owners.
How we can help
If you want to make managing your business finances easier, our team at Scorpion Bookkeeping can help. We provide cost-effective bookkeeping support services to a diverse range of clients in South Australia, New South Wales and Victoria.
And if you’d like to implement cloud-based Xero bookkeeping software, we can help you with that as well. We are a Xero-certified partner.
Contact us today for a free, no-obligation consultation to find out how we can help your business!