Ask yourself the question, what is the difference between profit or net income, and cash flow? The difference is huge! Accountants and CPA’s put together three financial statements; one is the Profit and Loss statement (your Income statement) which indicates profit or loss over some period of time – the Balance Sheet, which indicates the historical value of your company at a designated point in time – and finally, the third statement, which you may or may not have ever seen from your accountant, bookkeeper or from your advisor … the Cash Flow statement. There’s a major difference between profit from your business and cash flow from your business.
Our CPA’s perform business advisory services and we use a financial tool, a cash flow indicator, which details and analyzes how you track operational cash flow. Your statements may indicate considerable profit, but you may have little, if any, available cash. A definite problem! As a very simple example … you sell something or provide a service and you do not immediately receive the money – it’s called a trade receivable or an accounts receivable. When you recorded that receivable from your product or service you recorded the revenue, and thus, you reported the profit. However, you haven’t collected the cash. At year-end you reported three hundred thousand dollars in profit for the year – a nice year for the small business operation. However, of the $300,000 profit reported, $250,000 is locked up in receivables which haven’t been collected! And the collection of these receivables may or may not be good. Your ‘cash flow’ profit is actually $50,000 even though your books are indicating you’re at $300,000. Cash is King, Queen, Jack and Joker – it’s the lifeline of your business! Without it you cannot build your Balance Sheet which indicates the ultimate real value of your company. Many well operated and ‘profitable’ businesses go down due to the timing of cash collection, cash debt payment or simply stated, the lack of operating cash flow. Should you desire business viability, particularly over the long haul, your eyes should be trained on the necessity of appropriate cash flow. Completely understand, and if needed, immediately learn, the difference between the Profit and Loss statement (P&L), and the Cash Flow statement (CF) … this knowledge may save your business.