Cashflow Vs. Profit
So, what are the main differences between the two?
PROFIT is a measure of the income less expenses. It includes things like depreciation (as a recognition that the assets you use in the businesses wear out and need replacing over time). It also includes adjustments for debtors and creditors at year end. It specifically does not include movements in loan balances, fixed asset purchases and sales, or movements in owners equity like drawings.
CASHFLOW is different in that it looks just at the cash that moves through the business. As such, it does not include debtors or creditors – as these simply reflect cash you haven’t received or paid. It does reflect bank loan movements (with increases in debt being cash IN to the business, and loan principle repayments as cash OUT). It reflects cash spent on assets too.
The calculations of each of these is quite different, and in some ways the cashflow movements are more important than the profit calculations – if you don’t have cash to pay your bills (and yourself!) you will be in trouble real fast!
If you’d like to discuss the cashflow position of your business further, give us a call.