Understanding The Difference Between Profit and Cash Flow

To keep your small business running through the years, you must generate a profit and maximize your monthly cash flow numbers. Although these terms are related, their overall impact on your business operations varies considerably. As you work toward stability and growth in the business world, it pays to completely grasp the differences between profit and cash flow – and their individual impact on your operations in Missouri.

Profit Elements

The total price of your products minus fixed and variable expenses is the total net profit you make off each sale. As your sales totals increase, your profits rise in tandem, though no actual cash has changed hands yet. As a result, on their own, net profit figures cannot keep your business afloat until your clients pay their invoices in full.

When you generate your monthly income statements, the net profit totals at the bottom accurately depict your company’s ability to successfully thrive in your industry. The profit totals help lenders and investors assess risk and determine the viability of your company. Your ongoing profit totals are also used to calculate your tax obligations at the end of the quarter or year.

Cash Flow Characteristics

Cash flow refers to the amount of money your company receives as your clients pay for their orders. You must keep your cash flow figures at optimal levels to continue paying for your operating expenses. If your clients fail to fulfill their invoices, you may be unable to cover your bills, pay your employees and fulfill your other expenses, resulting in the collapse of your operations despite positive profit numbers.

If your profit numbers remain at acceptable levels, but your cash flow falls below projections, you can obtain a short term loan to cover your expenses. Since this is not a viable long term strategy, you must resolve the factors impeding cash flow to ensure the continued success of your small business.

To ensure your cash flow numbers can cover expenses, and profits enable continued growth, commit to keeping close tabs on your finances. You can work with an accountant at accountRely in St. Louis, MO to determine the best finance calculations to use for your small business. Your continued oversight will allow you to reach your goals in the business world without costly setbacks