One of the most misunderstood concepts in business finance is the difference between profit and cash flow. Many businesses have failed not because they were unprofitable, but because they ran out of cash.
What is Profit?
Profit is the difference between your revenue and your expenses over a given period. It's an accounting measure that can include invoices not yet collected, stock not yet sold, and expenses not yet paid.
What is Cash Flow?
Cash flow is the actual movement of money into and out of your business. A business is cash-flow positive when more money comes in than goes out in a given period.
Why You Can Be Profitable but Cash-Poor
- You invoice clients but they pay 60–90 days late
- You hold large amounts of stock
- You've invested heavily in equipment
- You pay suppliers faster than you collect from customers
How to Manage Cash Flow
- Produce a monthly cash flow forecast
- Shorten debtor collection periods (offer early payment discounts)
- Negotiate longer payment terms with suppliers
- Maintain a cash reserve of at least 3 months' operating expenses
- Review slow-moving stock regularly
Avatechtax prepares monthly cash flow statements and forecasts for our bookkeeping clients, giving you a real-time view of your financial position.
