Don’t get treated like a bank by your debtor
Don’t get treated like a bank by your debtor- The Art of getting paid on time
October 12, 2017
Changing Dynamics of Accounting Industry
Changing Dynamics of Accounting Industry
October 17, 2017
Cash Inflow vs Profit

Cash Inflow vs Profit Differences

Cash Inflow vs Profit Meru Accounting

There are instances where the business would be generating cash however it would not be generating a good profit from the operations. It can be vice versa as well meaning it might be generating cash flow but there might be no profit.

Cash flow analysis is a useful tool to track what is cash spent on which areas and from where there is a cash income.

Things you can do to ensure that you have a reliable cash flow and reduce the requirement of working capital loan

  1.   Offer discounts for prompt payments
  2.   Ask for a deposit when you take a client’s order
  3.   Issue invoices immediately and set payments expectations from the outset
  4.  Automate your invoice reminders to follow up on overdue accounts

Having a good cash flow need not imply that a business has a good profit. For obtaining profit over the running cash flow special efforts need to be implemented by the business. This, at the most basic level, includes keeping a track on the amount of cash the company spends which includes employee invoices, inventories,  suppliers, overhead expenses; and the amount of income that it receives from its clients. Maintaining a record and keeping an update on the working of cash flow will help understand the lagging factor for cash flow to reach the profit margin.

For cash flow to take place in a relentless manner without the need to fund the business with working capital loan and thereby ensure business profit, certain points need to be kept in mind by a business entrepreneur as follows:

a) ‘Prompt payment’ or ‘early payment’ discounts help inencouraging creditt customers to make timely or beforehand payments for the business products or services received. This ensures that customers don’t  delay payments to business and thereby helping in adequate  cash flow.

b) When a client gives an order for service or product, a request for making deposit can be made as a security and a source of fund for making the client’s order. This will suffice for making any extra expense that the business may incur.

c) Timely receivables for the business can be assured only when the invoice is raised on an immediate basis. Along with raising timely invoice, expectations from the outset need to be clearly specified by the business which facilitates ‘amount receivable’ for facilitating good cash flow.

d) Adequate cashflow may be hindered due to overlook on the overdue accounts and hence Automation of invoice remainders is essential to ensure that no overdue payment goes unnoticed.

Cash Inflow vs Profit Differences

Profit and cash flow are two diverse parameters relating to finance, however, when one is running a company, one has to keep a track of the two parameters. Cash flow is considered to be the money which would be flowing into and outside of the company from tasks relating to investing, financing, and operation. It is considered to be the money which is required to meet the present and the near-term commitments.

 A company’s profit is the difference between the sales or gross income of a company and its expenditure. In principle, it is clear that a company would not be able to survive for a long period if it is not profitable. However, with cash flow, at times, a product’s success could increase the costs. In a short period, it might not be evident that this is an issue.

 A business could have a cash flow which is positive, even when not having a profit in case the cash is received from sources, apart from income, for example, when a business owner takes a loan or invests their own money. Such kinds of transactions are not income. They are on the other hand, equity or liability transactions which are shown on the balance sheet.

 A business could also have a cash flow which is negative even when it has a huge profit. This can happen in case the owners of the company would take cash from the business for paying personal expenditure or using it for giving loans to other people or for making investments. Such kinds of transactions wherein cash goes out of the company are not shown in the profit and loss statement, but are shown in the balance sheet. The distinction between profit and cash flow would lead to the source relating to the accounting basis and also to the transactions in cash.

Comments are closed.