What’s the Difference Between Cash Flow and Profits?

More businesses fail for lack of cash flow than for lack of profit

We’ve had a number of clients ask for more clarity around this distinction, so we’ve explained this below.

In our article How Can we be Profitable but Without Cash?, we pointed out that most people think in terms of profits instead of cash.  Cash flow however, is critical.

It doesn’t matter how much money is coming in the future – we don’t spend profits, we spend cash.   Below is an example highlighting some key cash flow factors, including: sales on account, inventory (stock) and paying bills.

A Case Study – The difference between cash flow and profits

Let’s look at a ‘real’ business – The Beanstalk Bicycle Barn.

The Beanstalk Bicycle Barn

This is in a medium-sized local market and has sales of approximately $400,000 per year.

The chart below shows key operating numbers for The Beanstalk Bicycle Barn over six months.

Operating Numbers

The company is profitable so can pay the bills, right?  Remember: cash flow is not the same as profit.

Now compare this to a simple cash flow projection based on the assumption that the store makes 90% of it’s sales on account (i.e. they’re paid later) and its customers wait two months to pay those invoices (that would be unusual for a bike store, yes, but it’s common for many existing business-to-business companies).

Also, let’s assume The Beanstalk Bicycle Barn keeps about a month’s worth of sales as products in the store (stock or inventory).  These need to be bought in advance of selling them on to customers.  The result is a cash flow that is vastly different from profits, as you can see below:


The difference between profits and cash flow, in this case, is more than $50,000 for a business selling, on average, $35,000 per month.  This business would be profitable but possibly bankrupt because it lacks cash.  Yes, the business will eventually get the cash, however it needs to plan for the lack of cash in the meantime, via debt, investors, instalment arrangements etc, which will come at a cost.

The only change in the two tables is cash flow.  The sales, cost of sales and expenses have not changed AT ALL.  No prices changed, no new employees were added and there were no changes in salary.

The above scenario shows how vital it is to prepare accurate cash flow projections on a regular basis.  It’s one of the most important things a small business can do – alerting you to potential problems before they arise.

All business owners can benefit from cash flow planning.  The more you work with your numbers the better you will become in managing your cash flow.

Love to Grow can work with you to model your cash flows, profit and balance sheet for short term or

the next 1-3 years so you can:

  • Make better business decisions
  • Do your own ‘what if’ analysis using the spreadsheets we create for you
  • Update your key drivers and assumptions yourself, if wanted
  • See where to better manage your cash flow
  • See what tax and GST payments will be needed as your business changes
  • Have a budget to import into other systems such as Xero
  • See how strong your balance sheet will be and profit levels you will achieve
  • Improve your tax planning
  • Understand how much cash you can afford to use personally from your business

Identifying a cash flow issue well ahead of time, can allow you to be proactive and approach the bank with cash flow models to support your application for credit, if needed.

You can also learn which area you need to focus on most to unlock the cash in your business via a Business Improvement Scorecard Report – a number of our clients have literally unlocked over $100k cash into their bank account within 6-12 months.   You’d be amazed at how small incremental adjustments can make a big difference to your bottom line.

Check out Love to Grow’s workbooks on Understanding Business Cash flow and Improving Business Cash Flow or contact Love to Grow now for a free chat about your business needs.

Tel: (04) 972 4182 or (09) 282 3054

Cashflow Facts

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