Our Bookkeeping & Finance Blog

Cash is not profit and vice versa


The purpose of a business is to make money, which means you have to know the difference between profit and Cashflow.

Profit is what you have left (on paper) after you deduct all your business expenses from all your revenue. Your net profit is used to determine your tax liability. Profit does not equal what is in your bank account. You can increase or decrease profit by changing the actions that affect your revenue (income) and expenses (costs).

For example, if:

  • you renegotiate with your suppliers to get better discounts, or decide to carry less inventory – you can decrease your costs and expenses,
  • your staff engage with customers better, to learn more about what they do and don’t like – you could increase your sales by tailoring your services and goods. This will allow you to predict what and when your clients are likely to purchase from you.
  • you roster staff differently to take advantage of sales peaks and troughs, to run your business more efficiently.

The flow of actual cash, known as Cashflow, comes from the funds that come into, and go out of, your bank accounts. Cashflow is more than Income less Costs. As well as income received and expenses paid, it covers; operating expenses, GST and income tax payments, loans paid and received, equipment purchases, assets sold, repayments, pre-payments, distribution and dividend payments, and other non-trading activities.

A profitable business does not always have good Cashflow, and a business with good Cashflow is not always profitable. For example, you can have good Cashflow from loans and share-raising activities but still make a loss due to overheads and expenses exceeding your income. Amazon operated at a loss for four years after going public in 1997 but remained cash flow positive due to share-sales and investment income. They first made a profit in 2001 and are now worth over $1.5 trillion! They are the epitome of masterful cash flow management.

As Amazon demonstrates, positive Cashflow is critical during periods of business growth. Business expansion needs adequate investment; it means increased staffing and inventory or the purchase/lease of larger premises to facilitate an increased volume of sales. All these costs occur before you sell any extra goods, making sure you have adequate cash available is essential. If you don’t have enough cash to make these investments, you could suffer the consequences of being under-funded – a failed business.

Knowing your cash position and being able to predict the inflow and outflow timing of funds is always important, but during a growth phase, it becomes critical. It can make or break your business success. NumbleTM bookkeepers are experts when it comes to setting up reports to monitor and manage your Cashflow.

Keeping cash crowned as King

Your business can’t survive without cash, and the following nine takeaways are essential for business success:

  1. Protect your cash position by knowing what it is. Build a Cashflow report and keep it up-to-date. If you can foresee a shortfall, you are in a position to prepare for it.
  2. Create a cash buffer as insurance against unexpected difficulties.
  3. Protect your cash position against revenue shocks by maintaining a cash balance equivalent to at least two months of operating expenses.
  4. Be realistic with revenue expectations. Take action quickly if it looks like sales are not going to get you to your breakeven point.
  5. Implement credit checks, set up direct debits and take pre-payments and deposits to reduce the risk of customer non-payment.
  6. Make sure you have strong terms and conditions with clear payment terms agreed to by your clients in writing.
  7. Communicate regularly with customers and automate their payment options wherever possible.
  8. Make debtor management a priority. Set up standard, regular procedures around debt collection and delegate the task to a specific person. Make them accountable and have them report to you regularly.
  9. Every dollar you spend reduces cash reserves. The best way to protect your cash is to create a budget for your costs and expenses, and monitor your actual revenue and expenses against your budget on a regular basis.

NumbleTM can help you set up a Cashflow report and monitor your performance. If you don’t have one yet, talk to your NumbleTM bookkeeper or call Kim on 1300 852 575, or email hello@numble.com.au