Profit v. Cashflow - Why a profitable business can still run short on cash.

Running a profitable business doesn't always mean having money available when you need it. Understanding the difference between profit and cash flow can help you manage expenses, plan ahead and make more informed financial decisions.

What's the difference between profit and cash flow?

Profit is what's left after your business's revenue is reduced by its expenses.

Cash flow is the money moving into and out of your business, determining how much cash you have available to pay bills, wages, suppliers and loan repayments.

For example, you might complete a profitable job today but not receive payment for several weeks. In the meantime, you still need to cover wages and materials. Your business can be profitable on paper while experiencing a cash flow shortage.

Why can cash flow become a problem?

Common causes include:

• - Customers paying invoices late.

• - Large upfront expenses for equipment or materials.

• - Seasonal fluctuations in revenue.

• - Growing your business before receiving payment for additional work.

• - Existing loan repayments and other financial commitments.

Five ways to manage cash flow

1. Forecast your finances. Track expected income and upcoming expenses so you can identify potential shortfalls early.

2. Follow up on invoices. Invoice promptly and have a clear process for managing overdue payments.

3. Plan major purchases. Consider how buying vehicles, tools or machinery will affect your available cash.

4. Build a cash reserve. Where possible, set aside funds for unexpected expenses and quieter periods.

5. Review your finance. Check whether your existing loans and repayment commitments still suit your business. Refinancing or equipment finance may be worth exploring, depending on your circumstances and the associated costs.

Can business finance help?

Business loans, equipment finance and refinancing may help businesses manage certain expenses or fund growth while preserving cash reserves. However, borrowing isn't always the right solution, so it's important to understand the underlying cause of any cash flow difficulties before making a decision.

The bottom line

Profit measures how your business is performing. Cash flow helps determine whether you can meet your financial commitments when they're due.

Monitoring both can help you plan ahead, manage expenses and make more confident decisions about your business's future.

Need help exploring your options? Get in touch to discuss your business finance needs.

This article provides general information only and does not constitute financial, tax or accounting advice.