Wednesday, 18 October 2017

Information and commentary for the small business banking industry

Teach your small business customers the difference between cash flow and profit

08 Jun

All too often, small business owners (especially those who are just starting out) mistake cash flow and profit as the same thing. When they’re talking to you at the bank about their financial situation, it’s a good idea to guide them towards some content that explains the difference.

The goal of all business owners should be to have more cash coming in than going out. Cash is used to fund payroll, cover overheads, pay suppliers and purchase equipment. What it really boils down to is that without a healthy cash flow, a business won’t survive.

Profit’s what’s left over after all expenses have been paid, and it’s what tax is calculated on. It might seem odd, but there have been businesses that have gone under while still reporting a profit, and that’s because their cash flow was inadequate. So, while it’s important to focus on generating a healthy profit, the fact is that it’s cash flow that keeps a business running.

“Cash is king”

The reason we all hear that statement a lot is that without it a business can’t grow, secure financing or attract investors. This is because a cash flow statement is an actual report of what a business has available, whereas profit might show up on paper, but doesn’t reflect how much cash is actually in the business to help it grow.

A healthy cash flow also means a business is protected if it’s facing problems repaying a loan or if sales aren’t what they could be. It means a business can still run while problems like that are being sorted out:

  • The more cash a business has, and the closer its assets are to cash, the more liquid the business is. This is important when trying to secure finance, especially when a business is in a growth phase.
  • A strong cash flow means more opportunities to grow. If a business owner can’t purchase what they need to expand their business, they’ll notice it in their sales.
  • A healthy cash flow means the business owner understands their business and what makes it tick. This is essential when it comes to making business decisions. Business owners should make understanding their cash flow situation a top priority.

What it comes down to is that while profits help a business realize it’s financial goals, having a strong cash flow means it’s got what it need to not only keep operating, but it’ll have cash to reinvest in business growth.

Here at TSBC, we’ve got plenty of content around cash flow and profit. Get in touch with us so we can help boost your online content.


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Glen Senior
Glen is the founder and CEO of The Small Business Company, a New Zealand based agency that specialises in helping banks communicate with small businesses through content marketing. He has written a number of books on small business principles and is a sought after consultant and conference presenter.

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