Calculating Your Cash Flow
Struggling to calculate your company’s cash flow and understand how cash flow can impact profit? With Clearview software, it suddenly becomes easier.
What Is The Difference Between Profit And Cash?
Businesses need both profit and cash to sustain trading and growth. Although closely linked, they are managed differently which is why they are reported separately in business accounts. Looking at either on it’s own gives an incomplete picture. Looking at both leads to better decision making.
Profit is calculated with sales prices and costs Sales Value less Costs = Profit
Cash Flow is calculated with money received and paid out Cash IN less Cash OUT = Cash Flow
The timings of cash inflows and outflows is one of the main differences between profit and cash, particularly if you offer credit terms to customers, (they can pay 30 days after receiving goods), or receive credit terms from your suppliers, (you can pay 30 days after receiving goods).
Other transactions which can skew profit against cashflow are purchases of equipment. You may buy a new machine for £10,000 in cash now. The cost of this is written off over say 5 years at £2000 a year leading to a mismatch between cash and profit each year.
When seeking funding or making a business decision, it’s key to be able to prove that both profit and cash can be made. If cash is to take a dip, then you should have a forecast which shows that but which also shows profit can be made to contribute to repayments and recovery.