Defining Cash Flow and Profit: What’s their difference and why are they so important? - Visita Solutions

Defining Cash Flow and Profit: What’s their difference and why are they so important?

Entrepreneurs most especially new ones get confused about the difference between cash flow and profit. Some of them also don’t realize their importance when they are in the early stages of business. To set the record straight, cash flow is what you call the money coming in and out of the business. The goal is to make more money in than out. So what exactly is the difference between Profit and Cash Flow? It is a mistake to think that they are and not being able to identify which is which when you get introduced to accounting and bookkeeping will make it hard for you.

While cash flow refers to the inflows and outflows of money from your business, the profit on the other hand or also called the net income is your business’ revenue without the expenses. In the other words, it is the exact amount that you can consider for keeps after covering all of your business expenses. Cash inflow can also be considered as the fuel of your business because it is funded by customer payments, loans, investments, or interest on savings. At the same time, it is what will sustain the operation of your business; from employee salary to raw materials.

Naturally, positive cash flow is preferred because that will mean that the business is doing just fine. Having higher positive cash flow will be much better because it will pave the way for additional investments such as a new branch and lead to faster growth.

But you also have to know negative cash flow. This means there’s more money being released compared to the amount being received. There are two simple ways to generate a positive cash flow:

Be organized

If you are just beginning your business, the best first step is to reflect on the amount of money you have in hand. This may come from you personally as an investment for the business, cash from your business bank account, from a partner’s investments, or from loans that you have received.

Know that you have the amount of money that you have, the next thing you have to do is to list down the things that you have spent on or are expecting to pay at once. This can be composed of a lot of different things including licenses and permits, marketing materials, and signage, office supplies, etc.

Have a Plan

After doing the first step, now you must think long-term. Make sure you have listed the monthly expected expenses and profits. For new businesses, projecting sales conservatively is more advisable just to be safe. Otherwise, there is a tendency that you just be disappointed after not having a better inflow of cash than expected.

Assessing both your income and expenses will help you avoid overlooking things and getting unwanted surprises. Monthly expenses can be composed of rent or mortgage, insurance, advertising, marketing, website hosting, taxes, loan payments, working capital, and of course, payment for yourself.

Being honest and objective are the two traits that you must possess to ace the process. You must be precise on the estimation of costs so your decisions will be based on facts.

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