Cash Inflow vs. Profit Differences
There are instances where the business would generate cash; However, it would not be generating a good profit from the operations. It can be vice versa as well-meaning it might generate cash flow, but there might be no profit.
Cash flow analysis is a useful tool to track on what and how much cash you are spending on.
Things you can do to ensure that you have a reliable cash flow and reduce the requirement of working capital loan
- Offer discounts for prompt payments
- Ask for a deposit when you take a client’s order.
- Issue invoices immediately and set payment expectations from the outset
- 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 getting the 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. This 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 the cash flow will help to understand the lagging factor for cash flow to reach the profit margin.
For cash flow to take place in a relentlessly without the need to fund the business with the 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 in encouraging credit 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 help inadequate cash flow.
b) When a client gives an order for the service or product, a request for making a deposit can be made as a security and a source of funds 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 invoices, expectations from the outset need to be clearly specified by the business, which facilitates ‘amount receivable’ for facilitating good cash flow.
d) One will be hindering an adequate cash flow by overlooking the overdue accounts. Hence automation of invoice remainders is essential to ensure that no overdue payment goes unnoticed.
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 the money that would be flowing into and outside of the company for tasks relating to investing, financing, and operation. We consider it money that we require 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, a company could not 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 clear 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 that we show 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. The reason may be for paying personal expenditure or giving loans to other people or for making investments. Therefore, we do not show such kinds of transactions wherein cash go out of the company in the profit-and-loss statement. Rather, show it 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.