Profit vs. Cash Flow: Why Your Business Might Feel Tight on Cash

Many businesses deal with the dilemma of reporting a profit but still feeling like they have very limited cash left over. Bills stack up, expenses take over, and it feels like there is never enough cash to cover it all.

This can happen for many reasons, but often it is because the timing of income and expenses is not matching the movement of cash flow in the business.

The SBA identifies cash flow management as a vital part of running a small business and notes that even profitable businesses can experience cash problems. Typically, these problems stem from cash not being managed properly.

Cash Flow and Profit Are Not the Same Thing

Sometimes business owners use these two terms interchangeably, when in fact they are very different. Knowing the difference is important to the success of the business.

Cash flow looks at the movement of money into and out of the business. It identifies where money is being spent and where it is being earned.

Profit typically looks at the difference between business income and business expenses. The net profit of a business is determined by subtracting business expenses from business income.

These two things can happen at the same time but look very different. An example of this is when a business completes a service and records the income but has not yet actually received payment from the customer. The books may show revenue, but that cash has not actually shown up in the bank.

This gap between cash flow and profit can create problems if it is not identified and understood.

Why the Timing Is So Important

One of the reasons profit and cash flow can appear different is that businesses record income and expenses based on their chosen accounting method.

The IRS identifies two basic accounting methods: the cash method and the accrual method.

The cash method reports income when it is received and deducts expenses when they are paid.

The accrual method reports income when it is earned and deducts expenses when they are incurred, even if the money has not yet moved in or out of the account.

This means the timing of a sale, payment, bill, or expense can affect what shows on your financial statements versus the money that is actually sitting in your business bank account.

Understanding the difference between these two accounting methods and choosing what is best for your business can help improve that feeling of cash being tight.

Cash Flow Planning Will Help Your Business Look Ahead

Cash flow management is not just about knowing where your money is going. It is also about knowing what is coming next.

A good way to plan for future cash needs is by using cash flow projections. This allows business owners to use financial information to make smarter decisions and prepare for future growth.

A business might use cash flow information when considering things like:

• Hiring new employees
• Large equipment purchases
• New projects
• Business expansion
• Paying past debt
• Preparing for slower seasons
• Additional or unexpected expenses

Cash flow projection is a planning tool. It is not a guarantee of what is going to happen, but it can help business owners make more informed decisions.

Great Bookkeeping Makes All of These Decisions Easier

When a business owner makes it a priority to have current and accurate bookkeeping, it gives them much better information to work with in future decisions.

If your books are several months behind, it becomes challenging to know how well your business is actually performing. You may end up making decisions based on outdated financial statements.

Your business deserves more than that.

At Blueprint Tax Advisors, we know that your financial information should do more than help with filing taxes. Current bookkeeping and financial reporting can give you a much clearer picture of where your business stands and what changes may need to be made in order to continue moving forward.

If your business has been struggling with the feeling that cash is tight, it might be time to review your numbers and talk to someone who can help you understand why your business may be profitable but still feel short on cash.