Sales are good, and your business is making a profit. Then why is there no money in your bank account?
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.This is a problem if you have expenses that need to be covered today—not when your customers finally pay you.
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. 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.
If your business is short on cash, 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.
The difference between profit and cash flow can create some harsh realities for any small business owner. Fortunately, invoice factoring can be a convenient way to access capital when you need it.
This article was first published on November 12, 2016. It was updated on