Cash flow and profit aren’t the same thing. Although the two have overlapping characteristics,
it’s important to understand the differences to make informed business decisions and navigate
your business to success.
In this article, we’ll explore the differences between cash flow and profit and discuss how these
two items are related. By the end of this article, you should have the knowledge to use both
concepts in your business.
What is Cash Flow?
Cash flow monitors the transactions in your bank account. Deposits, or money coming in, are
known as cash inflows, while outgoing transactions, or expenses, are outflows. A positive cash
flow indicates your company is earning more than you are spending. On the contrary, a negative
cash flow highlights that expenses are exceeding revenue.
Cash flow is commonly monitored through accounting software, like QuickBooks Online, that
updates in real-time for transactions. This is because it can take days, or even weeks, for certain
transactions to clear your bank account. For example, if you write a check, how long does it take
to clear? Although the funds are still in your bank account for the next few days, you need to
factor that expense into your checking account to avoid overdrafting.
What is Profit?
Profit is the money your business earns during a specific time frame. Profit is found by taking
your revenue minus all expenses. There are different forms of profit. Gross profit is how much
money your business makes after subtracting direct expenses, also known as cost of goods sold,
from revenue. Net profit, also known as net income, is the overall profit after subtracting direct
and indirect expenses from revenue. Accounting software, like QuickBooks Online, calculates
both forms of profit on the profit and loss statement.
If you earn $10,000 in profit, that doesn’t always mean that your checking account increased by
$10,000. In fact, transactions that hit your checking account don’t always flow through to the
income statement. For example, if you made a loan payment, only the interest portion of the
payment will go to the income statement. This is one of the primary differences between profit
and cash flow.
How are Cash Flow and Profit Intertwined?
Cash flow tracks the movement of money in your business, while profit illustrates how much
money you have left over after all of your costs. Many of the cash inflows and outflows that
move through your checking account will hit the income statement and impact your profit;
however, some payments, like prepaids and loan payments, don’t.
In addition, there can be non-cash transactions that flow through to the income statement, like
amortization and depreciation. These items don’t come out of the checking account. This is why
it’s important that you track cash flow and profit separately in QuickBooks Online. Just because
your income statement shows $15,000 of profit, doesn’t mean you have $15,000 to spend.
Getting Started
Both cash flow and profit infuse transparency into your operations and can help you make more
informed business decisions.
How do you track each?
If you are still struggling to differentiate
between cash flow and profit or want customized solutions for improving your business’s
financial health, reach out to a team member today to learn more about how we can help.
