Making profit but have no money? Here’s why

Understanding the difference between profit and cash flow is key if you want your business to succeed. Once you understand the differences, you can begin to strategise how to boost your cash flow. Here are a few tips to help you get started.

What is cash flow?

Cash flow is a real-time stream of the money coming in and out of your organisation. A cash flow statement is a financial document used to analyse what happened to your cash during a specific period. It will also show the different areas in which a company used or received cash and settles the beginning and ending cash balances.

What is profit?

Profit is what’s left when your books are balanced, and expenses are subtracted from earnings. Profit is usually either distributed to the owners or shareholders of the business or reinvested back into the business. An income statement (or a profit and loss statement) is used to show the company’s profits. It’ll summarise the cumulative impact of revenue, gains, expenses, and losses during a specific period.

The difference between cash flow and profit

The main difference between cash flow and profit is that cash flow refers to the net flow of cash coming in and out of the business and includes money that is outside of the profit and loss, like loan repayments and GST. Profit is the net gain from business operations, so all the money customers pay, less all of the day to day expenses of running the business. Profits look good in your business reports and can help you get financing, but cash flow is what will keep the doors open.

Cash flow and profit are terms that are often jumbled together but they are both important in their own ways. You need to be able to understand both to be able to calculate the financial health of your business.

Reasons why your business is running out of money

It’s quite common for a business to be both making profits and have a negative cash flow. Your business could also be bustling with customers but that doesn’t mean your business is making money.

• Poor cash flow management
  Your financial liabilities can have a significant impact on your cash flow. Employees and ATO (Australian Taxation Office) obligations such as GST (Goods and Services Tax) and PAYG withholding, and superannuation are often misunderstood. These funds are not yours (or your businesses); they belong to your employees or the ATO and must be paid.
• Behind in customer invoices
  Looking at your accounts payable and receivable will help to decide if there’s a disconnect between sales and cash flow. If your account receivables are lower than your accounts payable then this will affect your business financials.
• High loan repayments
  When you need to make a loan repayment, your business needs to use its cash to repay the bank, and this decreases your cash account.
• Stock control levels
  Make sure you are reviewing your inventory on a regular basis and do random stock takes. If you’re buying large amounts of inventory, make sure your business really needs it. Until the stock is sold, you won’t be making any profit.
• Paying for personal expenses
  Often business owners are unaware that using company funds to pay for personal expenses or even just withdrawing money from your business account will impact your cash flow.

How Carbon can help

Carbon’s Bookkeeping & CFO Services team can help you get back on track by correctly managing your cash flow. It can be hard managing your cash flow on your own, so our experts are here to help you understand your financial needs. We can do a cash flow analysis to identify what your needs are and what you can do to improve.

As cloud-based bookkeepers, our team can help improve your accounts payable and receivable and will not only increase your productivity but will help you have full transparency in your business through the integration of online systems. Contact us to get started.