Profit is not Cashflow. It sounds obvious but many small businesses rely heavily on their Profit and Loss to assess their Cashflow position. However this only provides part of the picture.
Profit and Cashflow are closely related but they are very different measures of your business. Arguably it’s like comparing apples with oranges. You may be surprised to learn that even very profitable businesses can suffer from poor Cashflow.
The link between Profit and Cashflow is your Assets. Broadly defined as the things you use to generate income. They are listed on your Balance Sheet. If you have borrowed money to acquire assets then this is also recorded on your Balance Sheet. The value of your Assets less any money borrowed to acquire them is called your Net Assets.
It’s important then to also consider your Balance Sheet when assessing business Cashflow. Balance Sheet items impacted by Cashflow include:
- Collection of debtors (also known as Accounts Receivable)
- Payments for inventory
- Creditor payments
- Loan repayments
- New or increases to existing loans
- Purchasing assets, for example equipment, furniture, vehicles
- Selling these same types of assets
- Cash drawings by owners or dividend payments
- Tax and Super payments
Understanding and matching the timing of cash inflows and outflows is key to running a successful business. Using a 3 Way Cashflow will allow you to achieve this by bringing Profit, Assets and Cashflow all together in the one place.