Cash is not Profit and Vice Versa
Updated: May 7, 2021
"Never take your eyes off the cash flow because it’s the lifeblood of the business." - Sir Richard Branson
Are you improving your profits but not seeing an improvement in your bank balance?
This means you don't know the difference between profit and cash flow.
Don't worry. You're not alone.
It's one of the common misconceptions many mission-driven founders and CEOs don't realize until it's too late.
Net profit is what you have left after you deduct all your business expenses from all your revenue. You change net profit only by changing the things that affect revenue and expenses.
For example, if:
You renegotiate with your suppliers. You may get stock cheaper or carry less inventory.
Your staff engages with customers better, and you can learn more about what they do and don’t like – and get more business.
You can roster staff differently, and you may be able to run your business more efficiently.
Cashflow comes from various sources. However, it also covers operating expenses, taxes, equipment purchases, repayments, distribution, etc.
Note that a profitable business does not always have good cashflow. And a business with good cash flow is not always profitable. For example, you can have good cashflow and loss-making expenses.
There’s a massive difference between profit and cash. Let’s explore the differences to make a better plan to increase both.
Profit increases when you increase sales; cash increases when you collect the money from customers. To increase both your profit and cash from sales:
Delight your customers
Generate more leads and referrals
Convert a higher number of quotes or proposals
Increase transaction frequency
Increase transaction value
Profit increases when you send an invoice to a customer; cash increases when you collect the invoiced amount. To increase both your profit and cash:
Set clear Terms of Trade
Offer a small discount for early payment
Agree on the price in advance
Stick to your payment terms
Don’t do work for people who have overdue payments.
Increasing your margins will increase your profit; collecting the increased margin will increase your cash. To increase both your profit and cash:
Increase your prices
Negotiate better payment terms with suppliers
Reduce errors and rework
Train and empower your team
Increase your efficiency
Reduce your finance costs to increase your profit; borrow money for assets to increase your cash. To increase your profit and cash through financing:
Spread the costs of assets over 3-5 years instead of buying them outright (e.g., vehicles)
Borrow from a bank instead of a finance company
Secure the asset purchases over ‘bricks and mortar’ (if possible)
Reducing your overheads will increase both your profit and cash. To reduce your overheads:
Negotiate with suppliers
Measure your return on your spending (e.g., advertising, accounting fees, etc.)
Review your subscriptions
This is not an exhaustive list of ways to increase your profit and cash.
We can help you identify specific areas of improvement in your business to increase both profit and cash, let's chat.