When you set out to start your business, you likely weren't planning on spending a significant amount of time navigating your financial records. But as a business owner, there are a few key principles you need to keep in mind to keep your business growing and running.
One of the primary aspects that we see many business owners get wrong is assuming that having a positive profit means having positive cash at the end of the month. We teach our clients early on that net profit and cash flow are both important financial terms for a business, but they measure different things.
Net Profit: Think of net profit as a measure of how well your business is doing on paper. It's the money you make after subtracting all the costs and expenses from the money you earn from selling things or providing services. It tells you if, overall, you're making a profit or a loss. It's like looking at your bank account after you've accounted for all the bills and spending you've done.
Cash Flow: Cash flow is more about the actual money moving in and out of your business. It tracks how much money you have in your pocket at any given time. It considers things like when you get paid by customers and when you pay your bills and expenses. It tells you if you have enough cash to run your business, pay your bills, and maybe even invest in new things like equipment or hiring more people.
So, the big difference is that net profit looks at your business on paper, while cash flow is about the real money you have available to use. It's possible to have a good net profit but not enough cash in the bank to cover your day-to-day expenses, and that's why both are important to understand how well your business is doing.
Not sure where your cash flow stands? It may be time to hire a bookkeeper.