All too often, small business owners (especially those who are just starting out) mistake cash flow and profit as the same thing. When theyâ€™re talking to you at the bank about their financial situation, itâ€™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 wonâ€™t survive.
Profitâ€™s whatâ€™s left over after all expenses have been paid, and itâ€™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 thatâ€™s because their cash flow was inadequate. So, while itâ€™s important to focus on generating a healthy profit, the fact is that itâ€™s cash flow that keeps a business running.
The reason we all hear that statement a lot is that without it a business canâ€™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 doesnâ€™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 itâ€™s facing problems repaying a loan or if sales arenâ€™t what they could be. It means a business can still run while problems like that are being sorted out:
What it comes down to is that while profits help a business realize itâ€™s financial goals, having a strong cash flow means itâ€™s got what it need to not only keep operating, but itâ€™ll have cash to reinvest in business growth.
Here at TSBC, weâ€™ve got plenty of content around cash flow and profit. Get in touch with us so we can help boost your online content.
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.