Cash Flow vs. Profit: What's the Difference and Why It Matters

Transcription:

Are you a small business owner or entrepreneur looking to make sure your local business reaches its full potential? In this video, you'll discover the basics of cashflow and profits so you can confidently make decisions that will help your business succeed. We'll discuss what metrics should be watched closely, why forecasting is important, and tips on managing both cashflow and profits for optimal results - let's get started!

Starting or running a small business can be overwhelming, especially when it comes to understanding cash flow and profit. Many entrepreneurs don't understand the difference between these two metrics and how they affect their business growth. Without knowing how to manage both of them, businesses are at risk of not reaching their full potential. Today we're going to explore the basics of cashflow and profits for small businesses so you can confidently make decisions that will help your local business succeed!

We'll talk about what metrics should be watched closely, why forecasting is important, and tips on managing both cashflow and profits for optimal results. Let's get started! I'm Doug Barra, and today I'm talking about Cash Flow vs Profit and why it matters to hard-working local business owners who want to prove to themselves that they can be successful. You know, running a small business isn't easy.

And I want to help you get to the place you want to be - a place of success and financial stability. That's why I'm breaking down the difference between Cash Flow and Profit and why it's so important to understand. Let's dive in! WHAT IS CASH FLOW? Cash Flow is the money that comes in and out of your business. It's the money that comes in from sales and goes out to expenses like rent, payroll, and taxes.

Ultimately, Cash Flow is what keeps your business running. It's the lifeblood of your business. Cash flow is the movement of money within a business, specifically the amounts that are received and spent. It can be measured by tracking how much money is entering and leaving the business over a given period of time. Generally, it's divided into two categories:

operating cashflow and investing cash flow. Operating cash flow includes all money received and spent on day-to-day operations, such as payroll, rent, taxes, inventory purchases, and other expenses; Investing cashflow is used for activities such as purchasing new equipment or buildings. And keep in mind that both categories are the actual cash going in and out of the business. This is important to keep in mind as you will see later.

In order to maintain successful cash flow, small business owners must track and forecast their income and expenses regularly (on a monthly or even weekly basis) so they can identify any potential problems that could lead to financial issues down the road. This also enables them to take advantage of opportunities when they arise - such as making timely payments on invoices or taking advantage of discounts on supplies - that can help increase profitability in the long run.

WHAT IS PROFIT?

Profit is the money you make after you subtract your expenses from your revenue. It can also be referred to as net income or net profit, and is an indicative of how successful a business is. Profit indicates what percentage of sales are kept as retained earnings that can be reinvested in the business. It's important for small business owners to track their profits in order to understand how much money they have available to reinvest in their business, as well as how much money they can take home each month.

Profits are typically calculated by subtracting a company's total operating expenses and (salaries, taxes, rent, etc.) from its total revenue (the amount of money it has made from selling products or services).

This calculation represents an overall view of whether a business is doing well - if the profit amount is positive, then the company is making more money than it's spending; If negative, then the opposite is true. Profits can also be further broken down into gross profit and net profit; gross profit takes into account only direct costs associated with producing and selling goods or services, whereas the net profit includes all overhead costs. These are the costs that are not associated with the sale.

Think of it like this, if you have to pay this amount whether you make a sale or not, it's overhead. For small businesses, understanding both cash flow and profits will help them make informed decision about their finances and future growth. By tracking these metrics closely, businesses will be able to identify patterns that could indicate potential issues or areas for improvement before they become serious roadblocks to success.

Understanding these basics of cash flow and profits can help entrepreneurs develop strategies for managing their finances and maximizing their chances of success. Now, you may be thinking: ",How are they different? This sounds like you're saying the same thing just in two different ways." Remember I said that there are two different types of cash flow, operational and investing and that they both come out of the cash of the business. Well, investing cashflow is not represented in profit.

Let me say that again, investing cash flow is not represented, represented in profit. Yes, you heard me right. There is cash that goes in and out of your business that is not represented in your profit, especially in certain kinds of businesses and situations. So why do both Cash Flow and Profit matter? Well, Cash Flow is important because it's what keeps you in business.

Without it, you don't have the money to pay your bills and keep operations running. Check it out, go into the store tomorrow with your profit statement, and try to buy a loaf of bread! Of course, the clerk will ask for your money, or card, to pay for it. Cash flow is essential to the success of a business.

Without cash coming into the business, it's impossible to pay bills, salaries, and other expenses. Having a steady inflow of money will ensure that operations run smoothly and that the business can continue to thrive. Understanding what affects cash flow - such as sales volume, seasonality, and receivables - is key to managing it effectively. Profit is equally important as it shows how successful a company is by demonstrating its financial health.

Profit is the scoreboard of your business. Profit allows you to invest in your business's growth. Without it, you won't have the resources to grow or the money to keep yourself afloat. However, having profit does not guarantee that you have cash! Let me say that again. Having profit does not guarantee that you have cash!

So, as a local small business owner, it's important to understand the difference between Cash Flow and Profit and why they both matter. Understanding both cashflow and profits is crucial for any small business owner who wants to ensure success and stability in today's market. Being able to measure these metrics accurately and understanding the different variables that affect them will help entrepreneurs make informed decisions about their finances and future growth strategies with confidence. So, how can you manage your cashflow and profit?

First, it's important to stay up to date on changes in the marketplace and in the government that could affect your business. This means monitoring industry news, staying current with tax laws and regulations, and paying attention to any new incentives or programs that may be available. Additionally, understanding customer needs and expectations can help you anticipate potential shifts in demand for certain products or services.

Keeping aware of trends both within your industry as well as outside of it will ensure you are prepared for any changes that could negatively impact cashflow or profits. It's also important to develop relationships with local experts such as accountants, lawyers, bankers, a coach, and other advisors who can provide assistance in navigating complex financial regulations or changing market conditions. These relationships will ensure that your business has access to valuable resources and support when needed.

Next, have good relationships with your vendors and suppliers. It can be beneficial to your business. By building strong mutually beneficial partnerships with these partners, small businesses can effectively manage their cash flow by leveraging better payment terms that can help them manage expenses more efficiently. Additionally, establishing good relationships with vendors and suppliers can also lead to improved quality of goods and services as well as lower prices that can then be passed on to the customers.

Another important component of this relationship is communication. Small business owners should ensure that they keep vendors and suppliers informed about changes in their business, such as order sizes or customer demands. This will allow them to stay up to date on what's happening in their industry and anticipate any potential fluctuations that could impact their profits or cash flow. Finally, having a solid working relationship with vendors and suppliers will provide an extra layer of security should any legal disputes arise - having supportive partners who understand your business operations can make a huge difference in these situations.

Next, having an accurate and comprehensive financial plan is essential for small business owners in order to ensure that their finances are managed properly. Having realistic forecasts will help business owners stay on top of expenses, monitor cash flow, and accurately identify potential areas for profit or loss.

When creating a financial plan, it's important to factor in both expected and planned income as well as all necessary costs - such as rent supplies, salaries, marketing, etc. - so that you have a full understanding of your financial situation. Additionally, it's important to review the financial plan regularly (I recommend monthly) in order to make sure assumptions are correct, and any changes in market conditions or regulations are taken into account.

An accurate financial plan can also provide valuable insight into current performance metrics, such as return on investment (ROI) which can be used to identify potential areas for improvement or growth opportunities. Finally, having a clear grasp on your finances will allow you to anticipate any unexpected costs or fluctuations in cash flow so that you can more easily adjust course when needed. Keeping track of your finances and staying organized is key to running a successful business.

The first step is to establish a system or process that allows you to easily access financial information when needed. This could involve something as simple as using an online spreadsheet, a bookkeeping application, or even hiring an accountant. Additionally, it's important to keep all receipts and invoices organized so they can be tallied up quickly at the end of the month. Having a good filing system will also help you stay on top of expenses and taxes by making sure all relevant documents are accounted for.

Another helpful habit is to regularly review bank statements and credit card reports in order to identify any discrepancies or irregularities in spending. A great way to do this is to use a weekly cashflow forecast that you keep up-to-date with the bank. Furthermore, it's essential for small business owners to closely monitor their cashflow by creating projections that forecast future income and expenses.

These projections should take into account factors such as seasonality, sales volume receivables, customer trends, etc., in order to accurately predict cash flow. Again, this can be managed with a weekly cashflow forecast. You can learn more about financial plans and cashflow forecasts by attending the free web class I offer called The 3 Dangerous Pitfalls All Small Business Owners Face that keep them overwhelmed, Putting out Fires and Chain to their businesses.

Using these tools will ensure that your business has enough money on hand for necessary costs such as payroll and inventory, while still being able to meet any unexpected obligations like taxes or repairs. Finally, having an accurate insight into cashflow and budgets will enable entrepreneurs to make better decisions about where to best use their money in order to grow their business profitably.

If you're a small business owner, or entrepreneur, we would love to hear from you! Leave a comment below this video about your experiences with managing cashflow and profits. Describe the strategies you've used in the past and any advice that worked for you as well as any difficulties you encountered. Share with us what metrics have been the most useful in monitoring your success and how accurate forecasting has helped you make better decisions for your business.

Your insights could be invaluable to other entrepreneurs who are just getting started or need some guidance on how to best manage their cash flow and profits. Thank you in advance for your comments!

Would you like to learn more about Cash Flow vs Profit or other topics regarding business success?

Yes!

Great! Then there are a few things that you need to do right now.

First, please like this video so that I know you got value, and I'll make more videos like this one.

Second, subscribe to this channel, and click the bell to get notified whenever we post a new video so that you don't miss a single piece of the valuable information we share.

I'm Doug Barra.

I believe it takes great courage to own a local, small business. For the last 16 years, I've ensured that business owners like yourself get the time, money, and freedom you deserve.

Remember, sign up for your free web class by clicking the link in the description.

Thanks for watching, and I'll see you next time!