As you reopen your business in the new normal, it’s important to get a handle on your business finances—and that includes your profit and cash flow. But what’s the difference between the two? In this post, we’ll show you how to distinguish your profits from your cash flow so you can effectively manage them and grow your business in the process.
What’s the difference between profit and cash flow?
Even though profit and cash flow both deal with money for your business, they aren’t the same thing. In fact, you could have great sales and be making a profit, but not have money in your bank account. Here’s how they differ:
- Profit refers to the amount of money you have leftover after paying expenses
- Cash flow is the money flowing into and out of your business
To better understand the difference between profit and cash flow, it helps to keep in mind that profit looks at revenue and expenses during a specific period. If your revenue exceeds your expenses, you have a profit.
On the other hand, cash flow is always changing, and it’s dependent on when the money is actually collected. Sales on credit count as “revenue” even if your customers haven’t paid yet. Bottom line: You may have a profit—but not enough cash.
Cash-based vs. accrual-based accounting
If you’re strapped for cash, chances are, your customers aren’t paying on time. That can leave your business with a cash flow shortage. You obviously want to avoid this, especially if you have expenses that need to be covered today—not when your customers finally pay you. Prioritizing your accounting can help you prevent situations like this and maintain healthy working capital levels. There are two types of accounting you or your accountant can follow:
- Cash-based accounting: This is when you account for the actual cash that flows into and out of your business. In other words, you record income after you receive it and report expenses when they are paid.
- Accrual-based accounting: This is when you account for income and expenses as they occur, whether or not cash actually changed hands.
If you’re using accrual-based accounting, it’s possible to show a profit but still not have the cash you need to operate and grow your business.
How to boost cash flow
Short on cash? Don’t worry—you have options. You could implement a new cash flow management strategy, opt for financing, or change your business bank. Let’s look at the latter two options a little further:
Financing for cash flow
To boost cash flow, you might be able to borrow money from the bank or take out a line of credit. Another possible solution is accounts receivable financing. This process takes place when a factoring company like Bluevine is willing to lend you money now for invoices that are due in the future.
Better business banking for cash flow
Many banks charge fees for their business banking services—from monthly maintenance fees to non-sufficient funds fees to other hidden fees. When you’re trying to cut costs and maximize cash flow, avoiding these bank fees is key. One way to do this is by using a flexible small business checking account like Bluevine Business Checking.
With Business Checking, there are no monthly or hidden fees, 2.0% interest for eligible customers, and no minimum balance requirements or transaction limits.BVSUP-00005 Simply put, you’ll get more for your money.
Ready to open a Bluevine Business Checking account? Start here.
Originally posted on Manta.com in June 2018 and updated here on October 21, 2020.